Benefits and considerations of mutual funds

A fund may earn income from dividends on stocks or interest on bonds, which is passed along to its shareholders (minus any expenses).

If the fund sells securities that have increased in price, the fund has a capital gain Tooltip Capital gain is the profit you realize from the sale of a property or an investment . Most funds pass along these gains, minus any capital losses, to investors at the end of the year.

If the fund's securities increase in price during the time you own the fund and the manager holds onto them, the fund's shares increase in value. You can then sell your fund shares for a profit. 

• Most funds are actively managed. Active funds aim to outperform the market compared to a specific benchmark. 
• Index funds are passively managed, aiming to mimic the investment holdings and performance of a specific index.

• Think about the goals you want to achieve with a fund – total return, income, social responsibility, etc.
• If you want to match market performance, consider index funds.  
• If you want to potentially outperform the market, look at active funds.

• It's typically best to look at a fund's performance through a full-market cycle, which is typically three to ten years.
• Be sure to also compare a fund's returns to an appropriate benchmark (for example, the S&P 500®), as well as funds that invest similarly

• These are the percentage of invested assets paid to run the fund.
• Expense ratios vary by fund management (index vs. active), category, company, and even from fund to fund. 
• Generally, index funds have the lowest expense ratios because they're passively managed.

• For mutual funds outside of your retirement account, be aware you may be taxed on the fund's distributions, even if you continue to hold the fund or just purchased your shares.
• Consider a fund's turnover ratio; the longer the fund holds its securities, the lower the turnover and the lower the potential tax liability, and vice versa.

• How long the current manager or management team has been in place can be key when considering active funds, since they choose the fund's investments.
• Be sure the timeframe you're reviewing represents the same length of time the manager has been running the fund.