Mutual Fund Basics

Mutual Fund Basics

A mutual fund is a collection of securities that are invested according to specific objective(s) outlined in the fund's prospectus. Mutual funds offer investors an opportunity to have a professionally managed portfolio that invests in a number of different companies.

Mutual funds offer several benefits to investors. Because fund companies invest money that is pooled from a large number of shareholders, mutual funds give individual investors a chance to own shares of a group of companies that they otherwise might not be able to afford. Additionally, because the funds are run by professional managers, investors in mutual funds are spared the hassle of having to keep a daily eye on the market and make their own trades, and many of the fees and expenses associated with the fund are spread out across a broad base of shareholders.* One of the biggest benefits of mutual funds is the diversification they can offer to a portfolio. Owning mutual funds is a convenient way to achieve diversification without having to research dozens of individual stocks yourself (more on this below).

Most mutual funds are priced once each day, in contrast to publicly traded individual stocks, which fluctuate in price constantly throughout any given trading day. The fund's net assets at the end of a business day, divided by the number of outstanding shares is the fund's daily net asset value or NAV, which can generally be thought of as a fund's "share price."

Basic Fund Categories

Equity
Equity funds invest in equity securities, the most prevalent of which is common stock. Shares of common stock represent units of ownership in a public company. Firsthand's sector funds are equity funds.
Balanced
Balanced funds invest in stocks and bonds, in order to try to balance investors' exposure to equity and fixed income investments.

Money Market
Money market funds invest in highly liquid securites, such as commercial paper, banker's acceptances, government securities, and certificates of deposit. A money market fund's NAV is a constant $1; returns are typically generated through regular (often daily) dividend distributions.
Fixed Income
Fixed-income funds invest in securities that offer fixed rates of return, such as government, corporate, or municipal bonds. Fixed-income funds typically pay a monthly distribution to shareholders, based on the coupon payments of the underlying bonds.

One of the most significant benefits of owning a mutual fund is diversification. Because most funds hold dozens of stocks, they are less susceptible to the risk of a single company's performance. However, when a fund invests in many companies within the same industry or sector of the economy, that fund is less diversified than one that invests in several companies across numerous sectors or industries.

Mutual funds that focus their investments in one area are considered non-diversified specialty funds or "sector funds." Sector funds are a way for investors to reduce risk through diversification within one particular industry, but a single-sector fund should never comprise 100% of an investor's portfolio. One of the biggest risks of sector funds is that when that sector takes a hit in the market, the entire fund can suffer.

Firsthand Funds are technology sector funds and are subject to greater risk than diversified funds. Potential investors should be aware that an investment in a technology sector fund does not, by itself, constitute a balanced portfolio and is not appropriate if your key goal is preservation of capital or current income.

Load vs. No-Load

A load is essentially a sales commission, paid by the mutual fund investor to the broker who handles the account. Typical loads range from 3.5% (considered a low-load fund) to as high as 8.5%. No-load funds are just that—they have no load, or sales charge, and can be bought directly from fund companies, through mutual fund "supermarkets" (like Schwab or Fidelity), or through financial advisors.

Example

Let's say you invest $10,000 in a fund that charges a 5% load. That means $500 of your investment goes to the broker, and $9,500 is invested in actual shares. Additionally, there are different types of loads—front-end loads charge the commission at the time of purchase, whereas back-end loads collect these fees when you sell your shares. Firsthand Funds' technology sector funds are no-load funds, which means that every dollar of your $10,000 investment is used to purchase shares.

*Some expenses are borne solely by the individual shareholder, such as account maintanance fees and redemption fees. For more information on fees and expenses associated with Firsthand Funds, please read our prospectus.