Understanding mutual funds & how they work

Learn about investing in mutual funds

Understand the basics

What are mutual
funds? tab 1 of 3 Why invest in
mutual funds? tab 2 of 3 Things to
consider tab 3 of 3

What are mutual funds?

Mutual funds use money from investors to purchase stocks, bonds and other assets. You can think of them as ready-made portfolios. Mutual funds can help you diversify your own portfolio more easily.Footnote 1 As the fund's investments gain or lose value, you gain or lose as well.
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See what mutual funds can do for your portfolio and learn about possible risks.

Mutual Funds Can Offer Investors

  • Potential portfolio diversification
  • Low minimum purchase requirements (generally)
  • More efficient access to the securities in the fund compared to investing in each directly
  • Daily liquidity (you can sell shares back to the fund for cash on a daily basis)

Know the Risks Associated with Mutual Funds

There can be uncertainty regarding managers' performance against the benchmark
Mutual funds distribute taxable capital gains and dividends to shareholders each year
Mutual funds trade once a day, resulting in reduced portfolio visibility during trading hours
Expenses are deducted from the fund, which reduces the value of the portfolio

When Selecting Mutual Funds Consider:

  • Past performance measures performance over various timeframes such as 1-year, 3-year, 5-year, 10-year, or since inception, though past performance is no guarantee of future results
  • Risk measures such as information ratio and tracking error
  • Manager tenure and track records
  • Costs, especially expense ratio, as described in the prospectus
  • Your overall asset allocation strategy, investment time horizon and liquidity needs

What are the different types of mutual funds I can invest in?

Equity Funds

An equity fund (stock fund) is a fund that invests in stocks, also called equity securities. Stock funds can be contrasted with bond funds and money funds. Fund assets are typically mainly in stocks, with some amount of cash, which is generally quite small, as opposed to bonds, notes or other securities.

Fixed Income Funds

Fixed income funds are funds that emphasize income generation by investing at least 80% of their assets in debt issues, preferred and/or convertible securities.

Money Market Funds

A money market fund is a kind of mutual fund that invests in highly liquid, short-term instruments. These instruments include cash and cash equivalent.

Balanced Funds

Balanced funds are funds whose primary objective is to maintain a balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.

Target Date Funds

Target Date Funds are designed to be long-term investments for individuals with a specific retirement or selling date in mind. They are rebalanced and gradually shift an investor's asset allocation toward lower-risk investments as the target date approaches.

Index Funds

Index Funds offer clients returns that are based on the changes in the value of the market index to which a particular fund is linked. Some examples of commonly tracked indexes are the S&P 500 and the Russell 2000.

Common questions about mutual funds

If you're looking for more information, check out these responses to some of the common questions investors have about mutual funds
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Footnote 
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice-versa.

An investment in money market mutual funds is not a bank deposit, and is not insured or guaranteed by Bank of America Corporation or any of its affiliates or by the Federal Deposit Insurance Corporation or any other government agency. Although money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds. Please see the prospectuses for a complete discussion of the risks of investing in money market mutual funds.

The target date (or retirement date, as applicable) for these funds is the approximate date when an investor plans to start withdrawing the assets from their retirement account. The principal value of these funds is not guaranteed at any time, including at the target date. These funds are designed to become more conservative over time as the target date approaches.

Merrill Edge Select® Funds meet a proprietary screening process developed by the Chief Investment Office (CIO) of Merrill. The listing contains no-load funds with no transaction fees and load-waived funds that are open for new and subsequent purchases. Available funds have a minimum initial investment of no more than $3,000. Each fund must have $100 million or greater ($500 million for Large Cap funds) in assets under management across all share classes offered by the fund. Note that index funds are not included in Merrill Edge Select® Funds. To learn more about the Merrill Edge Select® Funds methodology go to merrilledge.com/MESFunds

When you purchase No Load, No Transaction Fee funds (NTF) or Load Waived funds, you will not pay loads, transaction fees or commissions. A Merrill Edge short term redemption fee of $39.95 is charged on redemptions or exchanges of NTF funds that are held less than 90 days. There are costs associated with owning a mutual fund, such as annual operating fees and expenses. For more information about investing in mutual funds at Merrill, please read the Mutual Fund Investing at Merrill Lynch pamphlet at ml.com/funds.

No investment plan is risk free, and a systematic investment plan does not ensure profits or protect against losses. This program is recommended for long-term investing in mutual funds. Since Automatic Investment Plans (AIPs) involve continual investment in securities regardless of fluctuating prices, you should consider your financial ability to continue investing through periods of low price levels. Your AIP purchases may be on margin. Borrowing on margin and using securities as collateral involves certain risks. Margin is not appropriate for all investors. Please refer to your Margin Agreement which outlines the risks associated with borrowing on margin.

Footnote 
Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as "MLPF&S" or "Merrill") makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation ("BofA Corp."). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC popup and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
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For broker-assisted trades through Merrill Edge, you will be charged a fee equal to the lower of $29.95 or 5.00% of the principal amount of the transaction. Further, there are indirect fees, such as annual management and other similar fees, that are charged by the manager or sponsor of an exchange-traded fund and of a closed-end fund, as disclosed in the product's prospectus.

Investment products offered through Merrill Lynch, Pierce, Fenner & Smith Incorporated, and insurance and annuity products offered through Merrill Lynch Life Agency Inc.:
Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
Are Not Deposits Are Not Insured by Any Federal Government Agency Are Not a Condition to Any Banking Service or Activity

Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
The performance data contained herein represents past performance which does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For performance information current to the most recent month end, please contact us.

Net Asset Value (NAV) returns are based on the prior-day closing NAV value at 4 p.m. ET. NAV returns assume the reinvestment of all dividend and capital gain distributions at NAV when paid.

Market price returns are based on the prior-day closing market price, which is the average of the midpoint bid-ask prices at 4 p.m. ET. Market price returns do not represent the returns an investor would receive if shares were traded at other times.

Returns include fees and applicable loads. Since Inception returns are provided for funds with less than 10 years of history and are as of the fund's inception date. 10 year returns are provided for funds with greater than 10 years of history.

Before investing consider carefully the investment objectives, risks, and charges and expenses of the fund, including management fees, other expenses and special risks. This and other information may be found in each fund's prospectus or summary prospectus, if available. Always read the prospectus or summary prospectus carefully before you invest or send money. Prospectuses can be obtained by contacting us.

Mutual Funds and Exchange Traded Funds: Expense Ratio – Gross Expense Ratio is the total annual operating expense (before waivers or reimbursements) from the fund's most recent prospectus. You should also review the fund's detailed annual fund operating expenses which are provided in the fund's prospectus.

Closed End Funds: Expense Ratio – Gross Expense Ratio is the ratio of the fund's total annual operating expense (before waivers or reimbursements) to average net assets as of the date of the fund's most recent annual report. You should also review the fund's detailed annual operating expenses disclosed by the fund in its annual reports, semi-annual reports, and other public filings.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory and other services. Additional information is available in our Client Relationship Summary (Form CRS) (PDF).

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as "MLPF&S" or "Merrill") makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation ("BofA Corp."). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC popup and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Banking products are provided by Bank of America, N.A. and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation ("BofA Corp.").

Merrill Lynch Life Agency Inc. ("MLLA") is a licensed insurance agency and wholly owned subsidiary of BofA Corp.

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