Mutual Funds are expected to be managed based upon the fund’s objectives, which are stated clearly in its prospectus. These objectives might state long-term growth of capital, high current income, preservation of capital, or a combination of objectives. Depending on its objectives, a fund may be a stock fund, owning shares of common stocks; a bond fund, owning corporate bonds, tax-free municipal bonds, government bonds; an index fund, investing in a portfolio that mimics an index, such as the S&P 500; or a balanced fund, owning both stocks and bonds.
For example, the Fidelity Magellan Fund has one investment objective; it “seeks capital appreciation.” The strategies it uses to achieve this objective are clearly stated. It normally invests primarily in common stocks. It invests in both domestic and foreign issuers. It invests in growth stocks and value stocks. And it uses fundamental analysis to make investment selections.
In addition to a basic investment strategy, funds can also employ other investment techniques that will be outlined in the prospectus. With regard to the Magellan Fund, it can lend the fund’s securities to broker-dealers or other institutions to earn income for the fund. It may buy and sell futures contracts and exchange traded funds to increase or decrease the fund’s exposure to changing security prices or other factors that affect security values. These and other options that funds have at their disposal, when used at the right time, help to provide mutual fund shareholders with improved returns.
All fund families advise prospective investors not to focus on performance alone. They strongly advise you, the investor, to read the prospectus carefully to review strategy, risks, and fees so you know the whole picture before investing. This is essential when evaluating a fund’s investment goal and strategy to make sure it aligns with your own.