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Mutual fund information: Basic FAQs

General


What's the difference between a load fund and a no-load fund, and why does it matter?

Load funds charge a sales fee, either when you buy shares (a "front-end load") or when you sell them (a "back-end load"). No-load funds—including all Vanguard funds—don't charge these fees.*

Loads have a direct impact on your investments by reducing the amount you ultimately invest or withdraw.

Here's a hypothetical example:

  • Initial investment amount: $10,000
  • Minus 5% front-end load: $500
  • Net investment amount: $9,500

In this situation, your fund's performance would have to make up a 5% "loss" before it broke even.

Should I pay attention to independent fund ratings?

Yes and no.

Mutual fund ratings from independent sources (for example, Morningstar or Barron's) can be a great resource for general information about a fund and a convenient way to compare mutual funds.

But keep in mind that ratings rely heavily on past fund performance. And as we've learned over the last few decades, yesterday's winners can just as quickly become tomorrow's losers.

So be cautious not to place greater emphasis on those ratings than you would on your answers to these questions:

  • Do the objectives of the fund match my investment objectives?
  • How might this fund fit into my overall investment portfolio?
  • What are the risks, and am I comfortable with them?
  • Can I find a similar fund at a lower cost?

You can find answers to these questions and more in each fund's prospectus. So to avoid any surprises, make sure you read it carefully before you invest.

How do mutual funds—and the people who invest in them—make money?

Stock and bond funds make money in two ways:

  • Income. When an underlying security that the fund invests in pays interest or dividends, the fund is required to distribute those earnings to its shareholders.
  • Capital gains. When a fund sells an underlying security at a price higher than what was initially paid, the fund makes a profit. When the fund's total profits exceed its total losses, it realizes a "net capital gain" and is required to distribute those gains to its shareholders.

Then how do investors make money?

  • When you receive an income or capital gains distribution from the fund.
  • When you sell your fund shares at a price higher than what you originally paid for them.

What's "total return"?

"Total return" represents the change in value—up or down—of an investment over a specific time period. It includes any interest, dividends, or capital gains the fund generated as well as the change in its market value (price).

In most cases, you'll see total returns for 1-, 5-, and 10-year time periods—or, for newer funds, since the day the fund opened (its "inception date").

Why is the return Vanguard reported for my fund different from the return I earned in my account?

Total return figures listed in public settings assume that:

  • An investment was made on the first day of the stated time period.
  • The investment was sold on the last day of the stated time period.
  • No money was added or subtracted during the stated time period.
  • All income and capital gains distributions were reinvested.

In real life, your experience was probably a little—or very—different. So your personal return generally won't match the fund's return exactly.

Have an account at Vanguard?

What's "diversification" and how does it help reduce risk in my investments?

"Diversification" is the strategy of spreading your savings among different types of investments in an attempt to lower overall investment risk. This approach can provide two benefits:

  • You're already in position to take advantage of the next upswing by investing in both areas of the market—instead of trying to accurately predict when stocks or bonds will "take off."
  • Growth in certain segments within your portfolio can help offset potential drops in other segments.

While diversification can never eliminate all the risks involved with investing, it can help lower your overall risk by spreading it around. There are three ways that you can diversify your investments:

  • Across asset classes. Spreading your money among stocks, bonds, and short-term reserves.
  • Within asset classes. Investing in all types of stocks (growth and value stocks from small, mid-size, and large companies) and bonds (short-, intermediate-, and long-term bonds from municipalities, government agencies, and corporations). We also recommend investing at least 20% of your portfolio in international funds for even more diversification.
  • Among mutual funds. Gaining access to hundreds—sometimes thousands—of securities through a single fund.

How risky is it to have most or all of my investments with one company?

While diversification could also include spreading your savings across multiple financial companies, we've often heard people talk about how much easier it is to manage their investments when they're all in one place.

So we make sure you can enjoy that convenience at Vanguard—and still have access to a wide variety of investments.

  • Choose from more than 120 Vanguard money market, bond, balanced, and stock funds, including international and sector-specific options.
  • Trade any of our more than 60 Vanguard ETFs®, commission-free.**
  • Buy and sell individual stocks, bonds, certificates of deposit (CDs), options, and thousands of other companies' mutual funds through a Vanguard Brokerage Account.
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REFERENCE CONTENT

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Front-end load

A sales fee that's charged when you buy fund shares. Fees can be as high as 8.5% of your purchase amount—which would reduce a $100,000 investment to $91,500.

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Back-end load

A sales fee that's charged when you sell fund shares. Fees can start as high as 5% to 7% but typically decline each year you're invested in the fund, ultimately disappearing after 5 to 10 years.

This may also be referred to as a "contingent deferred sales charge."

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Interest

The amount or percentage rate that lenders charge (and borrowers pay) when money is borrowed.

For example, when you buy a bond, the bond's issuer agrees to not only return your money to you at a specific time but also pay you a set percentage above what you originally invested to compensate you for "lending" the money.

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Dividends

Either the distribution of the interest (or income) generated by a mutual fund, or the payment of cash or stock from a company's earnings to each stockholder.

Dividends are typically distributed on a quarterly basis.

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Interest

The amount or percentage rate that lenders charge (and borrowers pay) when money is borrowed.

For example, when you buy a bond, the bond's issuer agrees to not only return your money to you at a specific time but also pay you a set percentage above what you originally invested to compensate you for "lending" the money.

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Dividends

Either the distribution of the interest (or income) generated by a mutual fund, or the payment of cash or stock from a company's earnings to each stockholder.

Dividends are typically distributed on a quarterly basis.

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Capital gains/losses

The difference in price from when you originally bought a mutual fund, stock, or bond to when you sold it.

A capital gain is when your sales price is higher than your purchase price. Gains could be taxable.

A capital loss is when your sales price is lower than your purchase price. Losses could be used to offset capital gains for tax purposes.

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Growth stock fund

A mutual fund that focuses on stocks from companies that are expected to experience higher-than-average profitable growth because of their strong earnings and revenue potential.

Growth stocks typically produce lower dividend yields because they prefer to reinvest those earnings into research and development to help grow the company and increase its profitability.

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Value stock fund

A mutual fund that focuses on stocks from companies that are typically found in low-growth or mature industries, often produce higher and more regular dividend income, and sell at discounted prices.