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• Advantage - Diversification.  Mutual funds offer the easiest method of reducing portfolio risk through diversification.  Though not all Mutual Funds are well diversified (such as sector funds), all investors should seek diversification to protect themselves from company and industry related risk.

• Advantage - Professional Management.  For a modest annual management fee the fund employs a professional portfolio manager(s) that provides: industry and firm analysis, security selection, portfolio balance, and market/firm timing decisions.

• Advantage - Recordkeeping.  One of the most underrated services a mutual fund provides is its recordkeeping.  Funds account for and report information on: dividends, interest, capital gains, and other distributions.  In addition, they produce timely summary reports for the individual on account activities.  At tax time, this service is invaluable.  At other times, this service helps the individual make more informed investment decisions.

• Disadvantage - Taxable Distributions.  Funds are obligated to distribute to shareholders a portion of the interest and capital gains realized annually on their investments.  Because of this, shareholders have little choice but to pay the taxes on the gains (viewed as additions to regular income by the IRS) the year they are reported.  Though some types of funds usually generate less taxable gains than others, distributions and their tax status are determined by the fund management and its portfolio strategies.

A Load is a sales commission deducted from your investment and paid to a salesperson (broker, financial planner, etc.).  There is no truth to the often heard rhetoric, that Load funds outperform No-Load funds.  As a matter of fact, when including the Load in the calculation, No-Load funds routinely outperform Load funds.  As an example, $10,000 invested in a fund with a 5% front-end Load would give you $9500 actually invested; just getting back to even would take a 5.27% return!

In addition to Loads, there are several kinds of Fees that may be charged by funds; these Fees shouldn't be confused with the funds annual management fee.  All mutual funds have an annual management fee, whether they have any additional Loads and Fees or not.  Below is a list of currently used Loads and Fees you might want to avoid (hint).

• Front - End Load:  0% to 8.5% of initial investment, goes solely to compensate salespeople for selling the fund.

• Back - End Load:  0% to 7.25% of initial investment upon sale, again this doesn't go to the fund management but to salespeople.

• Redemption Fee:  up to 2%, not the same as a back-end load, this fee is charged to discourage frequent trading and typically disappears after a stated amount of time.

• 12b-1 Fee:  0% to 1.25% of fund assets each year, unlike a Load that is paid only once, this fee is charged every year one owns the fund.  This Fee goes solely to pay for advertising and sales expenses.

Explanations of the different mutual fund categories (Aggressive Growth, Growth, Bond, International Stock, Small Capitalization Stock, etc.) are found almost everywhere; therefore, I'm not planning to include the same here.  If you seek such explanations try: books on mutual funds and investments, literature from mutual fund companies, or some online sources.

Though not a simple subject, it's important to understand the risks involved in mutual fund investing.  Below is a basic introduction to the subject.

1. Individual Company / Industry Risk - a well diversified mutual fund essentially eliminates this type of risk.  Certain funds such as sector funds, because of their specialization, have some amount of this risk; thus, they are more risky than diversified funds.

2. Category Risk - risk associated with the type (or category) of security within a given fund.  To view a listing of Investment Category Risks, jump to my general investments page.

3. Market Risk - the risk of general market fluctuations, usually measured as beta for common stock funds and average maturity for bond funds.
   • Beta - a measure of the relative volatility (risk) inherent in a specific mutual fund when compared to a general market measure, such as the S & P 500 index for stock funds.  A beta of 1.0 should roughly match the return and risk of the "market", while a beta of 1.25 would have a return and risk about 25% more than the "market"; 25% above it on the upside, and 25% below it on the downside.

   • Average Maturity - for bond funds this is the primary measure of risk because bonds are affected most by the trend in interest rates and bond funds of longer average maturity are affected more severely than those of shorter average maturity.  Like beta, a higher average maturity fund stands to gain more on the upside and lose more on the downside.

 - - - Don't forget your overall Asset Allocation while choosing Mutual Funds. - - -

The selection process often begins with the fund's investment return record; though, make sure you're comparing apples to apples in this part of the process.  In other words, comparing investment returns between two funds without paying attention to their other key factors: expenses, risks, and management; is a mistake.  In addition to the above mentioned items, omit funds that do (or don't do) any of the following:

• funds whose investment objective given in the prospectus is not specific, understandable, and consistent with your needs.

• funds that aren't quoted in the financial press (e.g., The Wall Street Journal, Barron's, Investor's Business Daily).

• Phone Exchange: moving money between different funds within the same fund family.  Remember, exchanging out of a bond or stock mutual fund is a sale; thus a taxable event for non tax deferred accounts.

• Check Writing: available with many money market and some short term bond funds.  Often, a minimum check amount of $250 is required.

• Auto Exchange: similar to phone exchange, except it's set up to occur on a regular (usually monthly) basis automatically.  This is one way to dollar-cost-average.

• Auto Invest: regular (usually monthly) electronic drafts from an investor's bank checking account to purchase fund shares.  Requires pre-authorization between bank and mutual fund company.  Another way to dollar-cost-average.

• Auto Withdrawal: the opposite of auto invest, money is regularly deposited into investor's bank checking account from the mutual fund company (possible taxable event).

In addition to investing through individual Mutual Fund companies, you can now transact in No-Load Mutual Funds by opening an account (regular or IRA) with most Discount Brokers.  Below are my two suggestions in this area, both offer a large number of No-Load Fund families to choose from and will charge no additional transaction fee on many of the individual Funds.  Be sure to choose the "no transaction fee" Funds, as some Funds available through these brokers are not exempt from transaction fees (that's both No-Load and no transaction fee).

• Charles Schwab, 1-800-266-5623

• Jack White & Company, 1-800-323-3263