          
          
          Wealthy individuals and institutions  have always had access
          to  professional  money  managers.   They  also   have   the
          wherewithal to properly diversify their holdings.  These are
          the  two  major  disadvantages for the small time individual
          investor - the relatively small size of their portfolio does
          not allow them  to  properly  diversify  and  most top money
          managers require a minimum of  $250,000 (or more) to open an
          account.
          
          Mutual funds provide the answer for the individual investor.
          Most  have very low initial investment requirements and some
          have no minimum requirement at all - you can start investing
          with as little as $100.00 or even less!
          
          What is a mutual fund?
          
                    A  mutual  fund  is   a   professionally
                    managed investment company that combines
                    the   money   of  many  individuals  and
                    invests this  "pooled"  money  in a wide
                    variety of different securities.
          
          It is by pooling the money of many individuals  that  mutual
          funds  are  able  to  provide  the diversification and money
          management (along with many other advantages) that were once
          reserved only for the wealthy.
          
          Professional money  managers  take  this  pool  of money and
          invest it in a wide  variety  of  stocks,  bonds,  or  other
          securities  depending  on the investment objective, or goal,
          of the particular fund.   It  is the investment objective of
          the fund that guides the manager in  selecting  the  various
          securities for the fund.
          
          It  is the investment objective of the fund that also guides
          the investor on which  funds  to invest in.  Since different
          investors have different objectives, there are a  number  of
          different  kinds  of  mutual  funds,  i.e.,  some  funds may
          provide monthly income  while  others seek long-term capital
          appreciation.
                    
          Mutual funds can be classified according to their investment
          objective.  Some of the classifications include money market
          funds, growth funds, balanced funds, income funds, and  many
          others.   (We will discuss the many different types of funds
          and their characteristics in a later chapter.)
          
          When you invest in a fund you hope that the value will  rise
          and  you can eventually sell your shares for a profit.  This
          is one  of  the  ways  you  can  profit  with  mutual funds.
          Another way is through capital gains.  When a fund  sells  a
          security  for a higher price than it originally paid for it,
          it is known as a  capital gain.  Most funds distribute their
          capital gains to shareholders at least annually,  some  more
          often.   The  last  way  to profit with mutual funds is with
          dividends or interest.  If the fund has invested in bonds or
          dividend-paying  stocks,  it  must  pass  the  dividends  or
          interest earned on to its shareholders.  Like capital gains,
          this is done at least annually.
          
          When you invest your money in  a mutual fund, you buy shares
          in that fund.  To determine the price of those shares,  each
          day  the fund adds up the total value of the securities held
          in its portfolio.  This  total  is  divided by the number of
          shares outstanding.  The resulting figure is  known  as  the
          Net Asset Value or NAV.
          
          To  find out the value of your holdings, you simply multiply
          the number of shares you  own  by  the net asset value.  The
          NAV of most funds is listed in most daily  newspapers.   The
          NAV  will  change daily depending on how well the underlying
          securities of the fund  perform.   If the securities held by
          the fund go up in value so will the value of your shares.
          
          As stated  above,  mutual  funds  are  generally  classified
          according to the investment objective of the fund.  They are
          also  classified  according to how they are bought and sold.
          There are open- or  closed-end  funds  and there are load or
          no-load funds.
          
          An open-end fund is a mutual fund that  continuously  issues
          new  shares as needed and buys them back when investors wish
          to sell.  There is no  limit  to how many shares an open-end
          fund can sell.  The buy and sell price is based on  the  net
          asset  value  of  the fund.  The majority of mutual funds on
          the market today are open-end funds  and are the type we are
          concerned with in this tutorial.
          
          The  characteristics  of  a  closed-end  fund  more  closely
          resemble that of an individual stock.  A closed-end fund  is
          a mutual fund that issues a fixed number of shares which are
          then  traded  (bought  and sold) on a stock exchange or over
          the  counter.   Although   the   underlying   value  of  the
          securities in a closed-end  fund  may be for example, $10.00
          per share, they may sell  for  more  or  less  depending  on
          investors outlook for the future value of the securities.
          
          Load  funds  are simply mutual funds with a sales charge, or
          load.   Load  funds  are  generally  sold  by  stockbrokers,
          financial  planners,  or  other  financial  salespeople  who
          charge you a commission every  time you buy new shares.  The
          highest load allowed is 8.5%  which  is  deducted  from  the
          amount  of  your  investment.   On  a $1,000 investment, for
          example, you are  really  beginning  with just $915.00.  The
          difference goes to the salesperson who sold you the  shares.
          This  is known as a front-end load.  There may also be a fee
          charged when you redeem,  or  sell,  your shares.  This fee,
          known as a back-end load, may be the only charge or  it  may
          be in addition to the front-end load.
          
          No-load  funds  are mutual funds with no sales charge.  They
          are generally bought directly  from  the fund.  100% of your
          money is invested in shares of the particular fund.  Similar
          to no-load funds are funds known as low-load  funds.   These
          are  funds  with  a load of between 1% and 3% and are bought
          either  directly  from   the   fund   or  through  financial
          salespeople.
          
          One  other  fee  to  be  aware of is the so-called 12b-1 fee
          (named after the SEC  regulation  that authorized it).  This
          regulation allows mutual funds to  charge  up  to  1.25%  of
          their  net asset value to pay for such things as advertising
          and marketing expenses.  If a fund charges 12b-1 fees (about
          40% do) it must be stated in the prospectus.
          
          In  this tutorial we are only concerned with open-end mutual
          funds.  This author  further  suggests  learning all you can
          about mutual funds and sticking  with  no-load  or  low-load
          mutual  funds.  There is no evidence that load funds perform
          better  than  no-load  funds.    Unless  you  need  help  in
          selecting a fund, go with a no-load fund and save the  sales
          charge.   Over time that "small" fee can mean many thousands
          of dollars to you.  Let's look at an example:
          
          Let's  assume you invest $10,000 in each of two funds, one a
          no-load fund and the other  a  load  fund with an 8.5% load.
          Let's further  assume  both  funds  earn  an  identical  15%
          average  annual  return.   After  5  years, the no-load fund
          would outperform the load  fund  by  $1,710; after 10 years,
          $3,439; and after 20 years the no-load fund would outperform
          the load fund by $13,911 - more  than  your  original  total
          investment!
          
            $10,000 invested:
            15% average annual total return:
           
                           No-Load         Load         Difference
                            
             5 years       $20,114        $18,404         $1,710
            10 years        40,456         37,017          3,439     
            20 years       163,665        149,754         13,911
              
          As the above example shows, it does pay to stay with no-load
          or low-load funds.
          
          
                                     ***
          
          
          In this chapter, we have described what a mutual fund is and
          how  they  are  classified  according  to  their  investment
          objective.  We have shown the three ways you can profit with
          mutual funds.  We have  also  described the charges a mutual
          fund can levy and why it may be best to stick  with  no-load
          or low-load funds.
          
          In the next chapter we will give a brief history  of  mutual
          funds and who invests in them.
          
          
          
          
                             *** End of Chapter ***
                             
          
          
          
