Forward

This means an investor's risk is not concentrated into one company (one security) but rather the risk is spread out over many different securities possibly representing several companies in a wide variety of industries. Our clients find this particularly appealing.

The History

King William of the Netherlands in 1822 was the first person credited with creating this type of investment concept, or what we refer to as the "unit investment trust" or group.

102 year later, the first open-ended trust was offered in the U.S. by the Massachusetts Investor Trust. Its net assets were $50,000 and invested among 45 different stocks. The mutual fund industry has grown to be the third largest financial industry in the United States.*

Professional Management

Typically, a mutual fund or investment company comes in the form of a trust, partnership or corporation. This entity is responsible to the shareholders for making investments in securities that match that of the fund's stated investment objective (found within the prospectus). These objectives are far and wide and may include aggressive or speculative growth, growth and income, balanced, moderate or low risk profiles.

The fund is typically managed by an individual, or group of individuals, who oversee the fund and are responsible for its day-to-day operations and activities.

Potential Advantages

Three of the greatest advantages perceived by the general investing public is 1) the expertise these individuals bring to the table; 2) it allows them to create a very sophisticated portfolio of securities at a very low reasonable cost; and 3) the ease of tracking.

Potential Disadvantages

As with many non-guaranteed investments, the principal (deposits) into a mutual fund investment will fluctuate with the underlying securities. Secondly, there is no guarantee that the mutual will experience a profit. Proper disclosure mandates that past performance is not an indication of future performance.

Another perceived disadvantage that investors face is the sheer number of mutual funds that are now available.

There are so many to choose from with varying investment objectives that without the help of an experienced financial advisor, determining which one or combination thereof can be a daunting endeavor.

Tax Status

As a whole, mutual funds enjoy a great many advantages. However, mutual funds must also follow very stringent rules regarding taxes. Since 1986, mutual funds must distribute 98% of their income, dividends and net realized capital gains both long and short in the year in which they are earned or realized.

Unless the mutual funds are held under an IRA, annuity or life insurance product, how much the fund distributes in income and capital gains has a direct impact on your net, after tax return.

Portfolio Turnover

Not all mutual funds are taxed equally, per se, because of what is called the the "portfolio turnover ratio." The porfolio turnover ratio, which is usually expressed as a percentage, measures how much the fund managers 'turn-over' the underlying securities which comprise the fund itself.

For example, a manager might buy and sell 120% of his holdings during the course of a year. If the underlying securities were sold at a profit, these gains are passed through to the shareholders and fully taxable.

However, a high portfolio turnover rate is not necessarily indicative of high potential capital gains exposure because it entirely depends on the gain/loss of the individual securities being bought and sold. Nevertheless, it clearly can have a negative tax impact.

Since the 1997 TRA was enacted (and with it the modification of capital gains tax treatment) funds which have a low portfolio turnover ratio, such as index funds or "tax managed" funds can potentially reduce your annual tax bite. However, to qualify for the lower tax treatment retail funds sold after July 28, 1997 must have been held for 18 months or longer.

We Can Help

Choosing among stock mutual funds, common stock funds, equity income funds growth & income funds, sector funds, precious metal funds and international funds can be made easier with the help of a Professional Advisor.

Many investors who choose to go direct to a fund company may lack the experience necessary to pick and choose the right funds. By going direct, the perception is that they bypass commissions.

However, what many people do not realize is they might end up buying a fund that does not meet their own suitability requirements or is in their best interest, and they may end up paying more in annual fees that had they gone through a broker to begin with.

Education is the Key

The majority of the investing public still use the professional advice and counseling that a broker provides. Remember that a "broker" is someone who represents YOUR interests, NOT a representative of the company.

Whether you are just starting out, or you currently have mutual fund holdings, we encourage you take advantage of our Assessment Service.

Action To Take

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