Course 201: Five Questions to Ask Before Buying a Mutual Fund
What Does It Own?
In this course
1 Introduction
2 How Has It Performed?
3 How Risky Has It Been?
4 What Does It Own?
5 Who Runs It?
6 What Does It Cost?

To set realistic expectations for what a fund can do for you, it's important to know what kinds of securities a fund's manager buys: Stocks? Bonds? Both? These broad asset classes have different characteristics, so you shouldn't expect them to perform in a similar manner. For example, most investors wouldn't hope for a 10% gain from a bond fund, but that kind of return may not be an unrealistic expectation for certain stock funds.

Unfortunately, you can't rely on a fund's name to tell you what it owns. Fidelity Magellan FMAGX is a giant in the fund industry, but its moniker gives you very little idea of the types of securities its manager buys.

As we mentioned earlier, fund managers can buy just stocks, just bonds, or a combination of the two. They can stick with U.S. companies or venture abroad. They can hold popular big companies, such as Coca-Cola KO or Procter & Gamble PG, or focus on small companies most of us have never heard of. They can load up on high-priced companies that are growing quickly, or they can favor value stocks with lower earnings prospects but cheap prices. Finally, managers can own 20 or 200 stocks. How a manager chooses to invest your money is one of the most important factors that will drive performance.

To get a feel for how a manager invests, examine a fund's portfolio. The financial statements published by the mutual fund company always disclose this information. You can also access portfolio data, including top holdings, sector breakdowns, and the Morningstar style box (which we'll explore in later lessons) on Morningstar.com and other Web sites.

Next: Who Runs It? >>


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