Why Mutual Funds?

A mutual fund provides you with:

• Liquidity - Mutual fund shares may be sold whenever you want. It's simple, and no penalty is imposed for early withdrawal (although there may be a redemption fee, depending on the fund).

• Convenience - With most mutual funds, you can buy and sell shares, change distribution options and obtain information by telephone, mail or online.

• Diversification - Funds invest in a variety of securities depending on the fund's investment objective. This helps reduce (but won't eliminate) your risk of loss from problems with a single issuer.

• Professional Management - An experienced manager ensures the fund's investments remain consistent with its investment objective by tracking a market index or using extensive research and market forecasts to select securities.

Mutual funds have certain disadvantages, too, which include limiting potential for a big return. The diversification factor that helps offset risk is also responsible for limiting your potential for a "big score" if the value of a single security increases dramatically. Diversification does not protect you from an overall market decline.

Also, your mutual fund investment could fall in value, and it is not guaranteed or insured by any government agency.

Finally, mutual funds have potentially high costs. In some cases, the efficiencies of fund ownership are offset by a combination of steep sales commissions, fees and high operating expenses.

Mutual fund investments make money when the fund earns income on its investments and distributes it to you as dividends. The fund may also produce capital gains by selling securities at a profit. You can also earn money by selling your shares of the fund at a higher price than you paid for them.

The type of profit from your fund investment depends on what types of assets your fund holds. The major asset classes differ in their tendency to produce income dividends, capital gains or share price appreciation, or a combination of the three.
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Mutual Fund Costs

All mutual funds have costs, but some are more expensive to own than others—and even seemingly minor cost differences can significantly affect the growth of your investment assets.

Mutual fund costs fall into two main categories: sales charges (known as "loads") and operating expenses. Not all funds impose loads, but all do have operating costs that are deducted from fund earnings.

Loads may be added to your account as either front-end, back-end or level.

A front-end load is charged when you purchase fund shares. Front-end loads also may be charged on reinvested distributions.

Back-end loads are charged when shares are sold. They are generally calculated based on how long the shares have been held.

Level loads are deducted annually from fund assets as marketing and distribution costs. These loads are used to pay commissions to brokers and the fund's financial advisor; generally they are reported as part of a fund's operating expenses.

Funds that have no sales charges are known as "no-load" (used by Assurity Advisors), while funds that charge loads of 1 percent to 3 percent are called "low-load."

Basic operating expenses include investment advisory fees, legal and accounting services, printing, telephone service, postage and other administrative costs. Operating expenses are usually deducted from a fund's earnings and are expressed as a percentage of a fund's average net assets.

In addition to loads and operating expenses, some companies charge other fees such as:

Exchange fee - Accrued when shares are sold and the proceeds used to buy shares of another fund in the same fund family.

Maintenance fee - Quarterly or annual charges used to offset the costs of maintaining small accounts.

Transaction fee - Charged whenever shares are bought or sold. They are used to help offset the cost of buying and selling securities.

Mutual funds are required to disclose all fees and expenses in their prospectus. But keep in mind that you should not base any investment decision on cost alone. As with any investment, your purchase decision should be based on a number of factors, including your ultimate goals and risk tolerance.

The best way to determine and compare mutual fund costs is to consult the prospectus. The Securities and Exchange Commission (SEC) requires funds to disclose all fees and expenses in a table that appears at the front of the prospectus. This table includes all expenses that a hypothetical investor would pay on a $10,000 investment at the end of one, three, five and 10 years.
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Types of Mutual Funds

Taxable money market funds pay dividends that are subject to federal, and possibly state and local, income taxes. There are three basic types:

• U.S. Treasury funds - These funds invest primarily in direct U.S. Treasury obligations whose principal and interest payments are backed by the "full faith and credit" of the U.S. government.

• U.S. government funds - These funds invest in high-quality obligations of the U.S. Treasury as well as agencies of the U.S. government. Agency securities are not backed by the full faith and credit of the U.S. government.

• General purpose funds - These funds invest in the short-term debt of large, high-quality corporations and banks.

The municipal money market fund is another type of money market fund that invests in debt obligations of state and local government agencies. These funds provide dividend income that is free of federal (and sometimes state and local) income taxes.

Balanced funds combine some of the traits of stock and bond funds in a single portfolio. While most balanced funds have common portfolio characteristics and investment goals, their investment strategies may differ.

There are two basic types of balanced mutual funds:

• Traditional balanced funds - These funds invest in a fairly stable mix of stocks, bonds and money market instruments in an effort to provide growth, income and conservation of capital. They are considered to be a relatively conservative, "middle-of-the-road" investment option.

• Asset allocation funds - These funds also invest in a mix of stocks, bonds and money market instruments. But unlike traditional balanced funds, these funds change the percentage of their holdings in each asset group in response to changes in market conditions. Generally, asset allocation funds are more volatile than traditional balanced funds.

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Investment Styles and Strategies

An actively managed fund will try to "beat" the market or a specific market index.

An active fund manager uses extensive research and market forecasts to select securities that the manager believes will increase in value over time. When the manager thinks the value of the investment is at its peak, the manager sells the security.

Active fund management offers a variety of benefits. Foremost is the potential for higher returns. While it might be difficult for a manager to beat the market consistently, it is not impossible. An active fund manager can profit from market trends—choosing among the most promising securities and "hot" market categories, or playing it safe by investing in cash to avoid short-term market volatility. This flexibility may help an actively managed fund to be among the best performers in any given year.

Active fund management also has some disadvantages including unpredictable returns. Poor management decisions or high fees and operating expenses can lead to a fund underperforming the market. Additionally, active management often incurs above-average operating expenses in the form of management fees and transaction fees. There is also an increase in tax liability because of the frequent buying and selling of securities.

A passively managed fund (also known as an "index" fund) seeks to match the investment performance of a specific target index. A passive fund manager does not actively buy and sell securities in an effort to beat the market. Rather, the manager simply holds all, or a representative sample, of the securities in the index.

One of the most important benefits of passive fund management is its lower costs. Lower management fees and reduced buying and selling of holdings keep transaction fees and brokerage costs to a minimum.

Passive management also provides increased predictability because the fund invests in the same securities that make up the target index. Additionally, because an index does not change its makeup very often, the manager of a passively managed fund is not required to buy and sell its securities with great frequency. As a result, the fund tends to distribute modest capital gains, if any. That means a lower tax liability for the fund's shareholders.

The drawbacks of passive fund management include limited returns and inflexible portfolio requirements. A passively managed fund cannot expect to beat the market; it generally does only as well as its target index. And a fund that remains fully invested in the stocks or bonds of a selected market index can be expected to perform badly during market downswings.
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