What Is A Mutual Fund?

Investments may take many forms. Some people buy and sell stocks and bonds while others purchase real estate. Another common investment tool is a mutual fund.

Mutual Funds

By investing in a mutual fund, you're essentially pooling your money with other investors to access a broader range of stocks or bonds than most people could own by themselves.

According to the Investment Company Institute, there were 8,684 mutual fund companies in the United States controlling close to $11.6 trillion in assets as of the end of 2011¹. The investment company uses the assets in the fund to buy and sell securities such as stocks or bonds in pursuit of a specific objective as outlined by the company charter. The fund objectives and other important information are found in the prospectus.

Mutual Fund Objectives

One objective a mutual fund may attempt to achieve is long-term growth of capital. This may be done by purchasing the stock of large companies that have consistently made a profit, or buying the inexpensive stock of smaller companies in hopes that the value increases. Some funds may be invested primarily in foreign companies while others invest in specific market sectors such as technology or health care.

Some funds are developed to generate income for the investors. Dividends from bonds or preferred stocks held by these funds are accumulated and distributed to investors on a regular basis. If the fund's assets are invested in municipal bonds, the dividends may be exempt from federal taxes, which would provide the investor with income taxed solely at the state or local level.

How A Fund Is Managed

Many funds are actively managed, meaning an experienced investment advisor will take an active role in determining the portfolio, or holdings, of the fund. The securities held in a fund may change based on how well a security performs and meets the objective of the fund.

Other funds are called index funds and attempt to mirror the performance of a given index, such as the S&P 500® or the Russell 2000® Indexes. The fund portfolio will generally contain stocks of as many companies in the index as is possible in amounts reflecting the weighting assigned by the index.

To obtain detailed information on a fund, read the prospectus. It explains everything from the fund's investment objective to the fee structure. Reading it is an important step to understanding the mutual funds that you may be considering.

¹2012 ICI Fact Book . Data for funds that invest primarily in other mutual funds were excluded from the series.

Investing involves risk, including potential for loss.

Diversification and asset allocation do not assure a profit or protect against loss. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates. The stocks of small companies are more volatile than the stocks of larger, more established companies. It is not possible to invest directly in an index.

The S&P 500® Index tracks the common stock performance of 500 large U.S. companies.

The Russell 2000 Index tracks the common stock performance of the 2,000 smallest U.S. companies in the Russell 3000 Index

The Russell 2500 Index tracks the 2,500 smallest companies in the Russell 3000 Index.

Neither State Farm nor its agents provide investment, tax, or legal advice.

Securities issued by State Farm VP Management Corp. For more information, call 1-800-447-4930.

Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.

AP2013/02/0828