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Investing Basics

Mutual Fund Basics

No matter what your financial goals are, mutual funds can help you achieve your investment objectives.

What Are Mutual Funds?

A mutual fund pools the money of people who have a similar investment objective, such as long-term growth or steady income. When you buy shares in a mutual fund, you and the other investors participate in the gains and losses of the fund’s investments.

How Are Mutual Funds Managed?

The fund’s investment adviser manages the fund and invests in securities that meet the fund’s investment objective, including:

  • Stocks — Shares of a company sold to fund business growth. When you buy a stock, you own a part of the company. Historically, stocks have shown strong potential to grow in value. Stocks also have potential to lose value.
  • Bonds — A loan agreement between the issuer — typically a company or government entity — and the buyer. If you buy a bond, the issuer usually agrees to pay you interest for a certain length of time and to return your principal. Bonds tend to be more stable than stocks, but they are not without risk.
  • Cash equivalents or money market securities — Investments such as short-term debt instruments,certificates of deposit and U.S. Treasury bills. They’re called cash equivalents or money market investments because they’re highly liquid and carry less risk than stocks or bonds.

The mutual fund’s investment adviser takes the pool of money in the fund and purchases a variety of securities. All of the fund’s investors then own a proportionate share of each security. When mutual fund investors are ready to sell their shares, the fund is required to pay that day’s net asset value for each share redeemed.

A mutual fund can gain value when the securities it owns pay interest or dividends or when the securities themselves rise in value.

What Are the Benefits of Mutual Funds?

There are many advantages to mutual funds, including:

  • Professional management — Managing investments requires a commitment of time, resources, experience and knowledge that most individuals don’t have. Mutual funds have investment advisers, which typically include professionals such as portfolio managers and investment analysts who do research on investors’ behalf. These professionals study companies full-time by reading reports and dissecting balance sheets.
  • Diversification — In a mutual fund, your money is invested in dozens or even hundreds of securities covering different industries that meet the fund’s objective. It would be difficult for an individual to own a portfolio that matches the diversification you’d find in a mutual fund. Owning a diverse mix of securities doesn’t eliminate risk, but it can reduce it because the ups and downs of individual securities can offset each other.
  • Convenience — Investors can sell their shares on any business day. This feature becomes important when you begin to withdraw your money in retirement.

Types of Mutual Funds

Most financial professionals suggest that investors balance their portfolios by investing across several types of investments. Which mix is right for you? That depends on a number of things — including your investment time horizon, risk tolerance and financial circumstances.

American Funds offers funds with an array of investment objectives to help you and your financial professional build a portfolio tailored to your needs.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.  

You could lose money by investing in the American Funds Money Market Fund. Although the fund seeks to preserve the value of your investment at $1.00 share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.  

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses , which can be obtained from a financial professional and should be read carefully before investing.   

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.  Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries.  Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. 

Investment allocations for funds of funds may not achieve fund objectives. There are expenses associated with the underlying funds in addition to fund-of-funds expenses. The funds' risks are directly related to the risks of the underlying funds, as described herein.  Although the target date funds are managed for investors on a projected retirement date time frame, the fund's allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals actively manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date.