Mutual Funds
Are mutual funds safe investments?
By Mary H. Cooper

Some 38 million Americans have invested more than $2 trillion in mutual funds. These investment pools have been around for years, offering small investors an opportunity to enter the stock and bond markets alongside wealthy individuals, pension funds and insurance companies. But never have mutual funds garnered the kind of attention -- and money -- that they have in the past few years. Lured by the. . . .

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Do current regulations adequately protect consumers who purchase mutual fund shares through banks?

Eugene A. Ludwig Comptroller of the Currency.. From testimony before The House Energy and Commerce Subcommittee on Oversight and Investigations, March 3, 1994.	Arthur Levitt Jr Chairman, U.S.. Securities and Exchange Commission. From testimony before The House Energy and Commerce Subcommittee on Oversight and Investigations, March 2, 1994.

Sorting Out Mutual Funds

A staggering array of mutual funds compete for investors' money. While making a choice can be daunting, the wide variety offers investors plenty of opportunity to find funds suited to their needs and to spread their investment dollars among different types of funds, thus reducing their risk of losses in any one. * In essence, there are four broad fund categories:

Common stock funds account for more than 1,400 of the 4,700 publicly traded mutual funds on the market today. They generally can be identified according to five different investment goals:

Growth funds primarily seek appreciation of investors' capital. Dividend income is a secondary concern.

Value funds try to achieve both growth and income.

Equity income funds strive for high dividend income.

Broad-based specialty funds make purchases in broad sectors of the market, such as international (non-U.S.) and global (including U.S.) stocks or the stocks of mid-sized companies.

Concentrated specialty funds buy only the stocks of one industry, such as high technology, health care or utilities.

Bond funds are more numerous and more diversified than stock funds. There are almost 1,700 bond funds in eight basic categories:

U.S. government funds invest in Treasury bills.

Mortgage-backed bond funds invest in securities issued by the Government National Mortgage Association (GNMA), known as Ginny Mae.

Investment-grade corporate bond funds invest in bonds issued by the soundest U.S. companies.

Medium-grade corporate bond funds pose higher risks, and offer greater potential returns, by focusing on loans to smaller or less creditworthy businesses.

High-yield corporate bond funds invest in so-called junk bonds, the riskiest corporate issues.

Investment-grade municipal bond funds focus on creditworthy local governments.

High-yield municipal bond funds invest in riskier local government bonds.

Global bond funds, the broadest of the lot, invest in bonds in the United States and abroad.

Money-market funds come in taxable and tax-exempt varieties; there are about 1,000 on the market. Tax-exempts invest in municipal bonds, the others in short-term instruments such as bank CDs, Treasury bills and short-term corporate loans. They offer check-writing privileges and interest rates that are higher than bank rates. Money-market funds are generally considered to be quite safe, but they are not insured.

Balanced funds create broad diversification by investing in stocks, bonds and money-market instruments. There are about 600 balanced funds, generally falling into one of three categories:

Equity-oriented balanced funds invest slightly over half their assets in stocks, the rest mostly in investment-grade bonds.

Income-oriented balanced funds limit stock investments to no more than about a third of their assets to stocks with high dividend yields to satisfy their main goal of high current income.

Asset allocation funds give broader discretion to managers to shift their assets among stocks and bonds according to market conditions and consequently can be either conservative or risky.

* Mutual fund definitions are based on John C. Bogle, Bogle on Mutual Funds (1994).