The Fund Industry: How Your Money is Managed, 2nd Edition

CHAPTER 4

Comparing Mutual Funds

To sort through the many funds available in the United States today, you'll want to go beyond the disclosure documents supplied by any single mutual fund. If you'd like to follow the lead of experienced investors, you'll follow a two-step process. First, you'll specify your investment objectives so that you can divide your investment dollars among four broad categories of funds in a process called asset allocation. Second, you'll choose specific funds within each of the four categories, by using third-party sources of information to compare the merits of these funds.

In making your first decision about asset allocation, you'll use categories based on the main types of securities the funds hold. While we provide a detailed review of the many types of funds in each group later in this chapter, the four main categories are in brief:

1. Money market funds. Money market funds offer modest returns with a high degree of safety. As a result, they are the mutual funds that are most like bank savings accounts. In fact, some have a stable NAV of $1 per share. However, unlike bank savings accounts, money market funds are not insured by the federal government, and investors can lose money in them. A few institutional investors actually did see the value of their money fund holdings decline during the 2008 financial crisis.
2. Bond funds. Bond funds normally pay a higher rate of interest than money market funds but without the same level of security: the value of ...