Mutual Funds

Overview

There are dozens of magazines cluttering the shelves of your local book megastore with covers proclaiming "The Best Mutual Funds You'll Ever Find for This Year!", "Mutual Funds That Really Work in Crazy Markets Like This One!" and other equally over-capitalized headlines. Don't pay any attention to them. Almost everything that you'll ever need to know about mutual funds is contained in these four simple words: "Buy an index fund." If that seems too simple and not sufficiently attention grabbing, try it this way: "BUY AN INDEX FUND!"

Introduction to Mutual Funds

A mutual fund is simply a collection of stocks and/or bonds. Most mutual funds are "actively managed," meaning the mutual fund shareholders, through a yearly fee, pay a mutual fund manager to actively buy and sell stocks or bonds within the fund. Though you would think that mutual funds provide benefits to shareholders by hiring alleged "expert" stock pickers, the sad truth of the matter is that the vast majority of mutual funds underperform the average return of the stock market. Over time, because of their costs, approximately 80% of mutual funds will underperform the stock market's returns. Currently, most mutual funds do not make their fees very easy for shareholders to understand. (Founding Fool David Gardner testified in September 1998 before Congress on this very topic.

On the whole, the average mutual fund returns approximately 2% less per year to its shareholders than does the stock market in general. The stock market's historical returns are roughly 11% per year, but managed mutual fund shareholders as a group can expect to see any return reduced by the approximate costs imposed by the funds.

How Mutual Funds Work

What They Are

A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate.

Some of the traditional, distinguishing characteristics of mutual funds include the following:

	Investors purchase mutual fund shares from the fund itself (or through a broker for the fund) instead of from other investors on a secondary market, such as the New York Stock Exchange or Nasdaq Stock Market.
	The price that investors pay for mutual fund shares is the fund's per share net asset value (NAV) plus any shareholder fees that the fund imposes at the time of purchase (such as sales loads).
	Mutual fund shares are "redeemable," meaning investors can sell their shares back to the fund (or to a broker acting for the fund).
	Mutual funds generally create and sell new shares to accommodate new investors. In other words, they sell their shares on a continuous basis, although some funds stop selling when, for example, they become too large.
	The investment portfolios of mutual funds typically are managed by separate entities known as "investment advisers" that are registered with the SEC.

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Guide the Way

Today's markets are full of exciting investment opportunities, giving you the ability to invest in ways you wouldn't have imagined possible just a few years ago: Large Caps, Small Caps, Growth Stocks, Value Stocks, Foreign Emerging Markets, Foreign Developed Markets… the list goes on and on. But let's face it, all of this choice makes it that much more difficult to weed out the noise and find high quality investments with the potential to grow your capital over the long term. That's why Fidelity is pleased to announce the reopening of the Fidelity New Millennium Fund effective May 1, 2007.

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