A mutual fund is an investment company that pools money from shareholders to invest in a diversified portfolio of securities. When an investor puts money into a mutual fund, the investor is purchasing shares of that fund. Each share represents proportionate ownership in the fund's underlying securities.

Mutual funds are managed by professionals who employ an investment strategy to meet the objectives stated in the prospectus. Although there is no guarantee that the objectives of a particular fund will be achieved, fund managers choose investments based upon the mutual fund's goal - growth, current income, and so on. The funds are generally well diversified to offset potential losses. As economic conditions change, the blend of investment instruments in the fund may change, depending on what the prevailing situation calls for - sometimes a more aggressive stance, sometimes a more defensive one.

Types of Mutual Funds

There are four basic types of mutual funds:

• Stock Funds
  Sometimes called equity funds, the primary purpose of these funds is to provide growth of capital through equity investments, although some also seek to provide dividend income as a secondary objective.
   
• Balanced Funds
  These funds invest in common stocks, preferred stocks, and bonds in an attempt for high returns with less volatility.
   
• Bond Funds
  The main goal of these types of funds is to provide current income by investing in U.S. Government, corporate or municipal debt obligations.
   
• Money Market Funds
  A money market fund is a mutual fund that invests in short-term obligations created by groups of local governments, the federal government, banks, or large corporations. These are the lowest-risk investment among all mutual funds. However, they tend to provide the lowest returns.
  
  An investment in any money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at one dollar per share, it is possible to lose money by investing in the fund.

Advantages and Disadvantages