Mutual Funds For Dummies. Eric Tyson
primarily in stocks. (Check out Chapter 13 for the complete story on stock funds.)
Bond funds: If you need current income and don’t want investments that fluctuate as widely in value as stocks do, consider bond funds (see Chapter 12).
Money market funds: If you want to be sure your invested principal doesn’t drop in value because you may need to use your money in the short term, you can choose a money market fund (see Chapter 11).
Most investors choose a combination of these three types of funds to diversify and help meet different financial goals. I get into all that information in the chapters to come.
Fund risk of bankruptcy is nil
Fund companies don’t work like banks and insurance companies, hundreds of which have failed in decades past. (The number of companies going under spiked during the late 2000s recession.) Banks and insurers can fail because their liabilities (the money customers have given them to invest) can exceed their assets (the money they’ve invested or lent). When a big chunk of a bank’s loans goes sour at the same time that its depositors want their money back, the bank fails. That happens because banks have less than 20 cents on deposit for every dollar that depositors place with them. Likewise, if an insurance company makes several poor investments or underestimates the number of claims that insurance policyholders will make, it too can fail.
Such failures can’t happen with a fund company. The situation in which the investors’ demand for withdrawals of their investment exceeds the value of a fund’s assets simply can’t occur because for every dollar of assets that a fund holds for its customers, that fund has a dollar’s worth of redeemable securities.
You may be interested to know that the specific stocks and/or bonds that a mutual fund buys are held by a custodian — a separate organization or affiliate of the fund company. The employment of a custodian ensures that the fund management company can’t embezzle your money (like the infamous crook Bernie Madoff did) or use assets from a better-performing fund to subsidize a poor performer.
Funds save you from sales sharks
The better no-load (commission-free) fund companies discussed in this book generally don’t push specific products. Their toll-free telephone lines are staffed with knowledgeable people who earn salaries, not commissions, and their websites enable you to quickly find needed information on your own if you so choose. Sure, these fund companies and their employees want you to invest with their company, but the size of their next paycheck doesn’t depend on how much they persuade you to buy or trade.
You have convenient access to your money
The best fund companies are set up for people who don’t like to waste time going to a local branch office and waiting in line. I don’t know about you, but I enjoy waiting in lines, especially in places like a bank, about as much as I enjoy having my dentist fill a cavity.
With mutual funds, you can make your initial investment from the comfort of your living room by completing a simple application form (including in most cases online) and either sending money electronically to fund your fund account (see Chapter 16 for details) or by writing and mailing a check. Later, you can add to your investment by mailing in a check or by authorizing money transfers by phone or online from one mutual fund account to another.
Selling shares of your mutual fund for cash is usually easy. Generally, all you need to do is call the fund company’s toll-free number or click your computer mouse at your investment firm’s website 24/7. Some companies even have representatives available by phone 24 hours a day, 365 days a year. (Signature guarantees, although much less common, are still sometimes required by fund companies.)
Many fund companies also allow you to wire money back and forth from your local bank account, allowing you to access your money almost as quickly through a money market fund as through your local bank. (As I discuss in Chapter 11, you probably need to keep a local bank checking account to write smaller checks and for immediate ATM access to cash.)
DON’T FRET ABOUT THE CROOKS
Folks who grew up dealing only with local banks often worry about others having easy access to the money you’ve invested in funds. Even if someone were able to convince a fund company through the toll-free phone line or on its website that they were you (say, by knowing your account number and Social Security number), the impostor, at worst, could only request a transaction to occur between accounts registered in your name. You’d find out about the shenanigans when the confirmation arrived in the mail or your email, at which time you could call the fund company and undo the whole mess. (Just by listening to a tape of the phone call, which the fund company records, or a record of the online transaction, the company could confirm that you didn’t place the trade.)
No one can actually take money out of your account, either. Suppose that someone does know your personal and account information and calls a fund company to ask that a check be sent from a redemption on the account. Even in such a scenario, the check would be sent to the address on the account and be made payable to you.
The only way that someone can actually take money out of your account is with your authorization. And there’s only one way to do that: by completing a full trading authorization or power-of-attorney form. I generally recommend that you not grant this authority to anyone. If you do, make sure that the investment firm makes checks payable only to you, not to the person requesting the money from the account.
If you like to conduct some transactions in person, some of the larger fund companies, such as Fidelity, and certain discount brokers, such as Charles Schwab and TD Ameritrade, have branch offices in convenient locations. For more information on discount brokers, see Chapter 9.
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