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December 29, 2005
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If market uncertainty makes you skeptical about investing, consider mutual funds, explains the Pennsylvania Institute of Certified Public Accountants.

In mutual funds, your money is pooled with money from many other investors with similar or mutual goals. Professional money managers invest the money in stocks, bonds and a number of other securities.

Each investor owns shares in the fund, and participates proportionally in the fund's gains or losses. In this way, you can reduce the possibility of a significant loss that comes from an individual holding.

Mutual funds are not guaranteed or insured by any government agency, but they are regulated by the Securities and Exchange Commission.

To help you better understand the risks, rewards and bottom line of investing in mutual funds, the PICPA offers the following key facts to consider when making a purchase.

• Types of Funds - Most mutual funds fall into one of three main categories: stock funds (also called equity funds), bond funds, and money market funds. Within these three primary categories are thousands of funds with different strategies aimed at meeting the various investment objectives of fund-holders.

• Minimum Investment - Most funds require a minimum investment of anywhere between $250 to $2,500, although some may fall above or below that range.

• Pricing - The price that investors pay for mutual-fund shares is the fund's per share Net Asset Value, plus shareholder fees, if any, imposed at the time of purchase. The NAV fluctuates every day as fund holdings and share prices change with the ups and downs of the market.

Fund-share prices appear in the financial pages of most major newspapers.

• Generating Income - You can earn money from mutual-fund investments in three ways. Income can be earned from dividends or interest the fund makes on investments in its portfolio.

If the fund sells securities that have increased in price, the fund then has a capital gain, which is typically passed on to investors in a distribution process.

If fund holdings increase in price, the shares also increase in value. You can then sell your mutual-fund shares for a profit. Of course, the reverse can always happen, and a mutual fund could drop in value.

• Mutual-Fund Fees - All mutual funds have costs that lower the fund's investment returns. Operating expenses cover the cost of running the fund, including management fees, distribution fees and other expenses.

Some funds impose fees or sales charges when investors buy shares. This fee is referred to as a "front-end load."

A fund that charges a fee when you sell shares has a "back-end load."

A "no-load" fund sells its shares without a fee or sales charge, but even they are able to charge for operating expenses.

Gaining an understanding of mutual-fund fees is critical for long-term investors. Mutual-fund fees may seem to have only a minor effect on a fund's return, but over a long period of time, they can have a devastating effect on a return, and what initially looked like a good investment may prove otherwise.

It's even more important to keep fees in mind when investing in a bond fund. When a high fee that is charged by a bond fund is combined with the effects of inflation, long-run returns will almost always be disappointing.

Mutual-fund fees should be the most important criteria discussed with your financial advisor when investigating a fund and how it has done in the past.

• Past Performance - A fund's past performance is not a reliable indicator of future performance. Don't use this as the basis for an investment decision, as history has shown that future returns may not have anything to do with what happened before.

• Buying and Selling- Mutual funds are easy to buy and sell. You can purchase shares directly from the fund company or through a third party, such as a broker or a bank.

• Fund Management - Investment advisors who are registered with the SEC manage the portfolios of mutual funds.

• Overall Advantages - The key advantage in a mutual fund is diversity. Instead of owning individual stocks or bonds, a mutual fund spreads risk across a broader portfolio of investments.

Other advantages include professional management, simplicity and convenience. Investors also have easy access to their money, making a mutual-fund investment a liquid asset, which comes in handy when money is needed fast.

• Getting the Facts About Funds - Remember this: All funds offer a prospectus that should be read carefully prior to investing.

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