Dear Friend, A little over a year ago, more than 55 million households in the U.S. owned one or more mutual funds. In 1980, that number was under 5 million — a growth rate of over 1,000%! If you're looking to invest in funds, you're certainly not lacking for choices! According to the Investment Company Institute, there are currently more than 9,000 U.S. funds to choose from, which, collectively, claim more than $11.4 trillion in assets. Stock funds, bond funds, money market funds, taxable and tax-free funds, sector funds, growth funds, income funds — you name it, there's a fund to cover it.	The 4 Things We Really Like About Mutual Funds What We Don't Like About Mutual Funds Open-End Funds vs. Closed-End Funds 3 Ways to Earn Money Through Mutual Funds How to Choose the Right Mutual Fund for You Three Simple Steps to Selecting the Right Funds Making Sense of Mutual Fund Fees Information You Don't Need Making Your Money Work Harder for You!
We believe that mutual funds can be a very useful tool to help you achieve your financial goals, IF you pick the right funds. While there are some excellent, well-managed funds from which to choose, there are some real dogs, too. And that's where investors often get stumped. With so many choices, finding the right mutual fund for your needs is like finding the proverbial needle in a haystack. No worries — we can help! If you don't know us, we're Ken and Daria Dolan. For more than a combined 40 years, as Wall Street professionals and then in the national media, we've been giving our readers and listeners straight talk on their money questions on radio and TV, in books and newsletters, and now at Dolans.com. And if there were ever a subject that could use a little straight talk, it's mutual funds!

We wrote this Special Report to take the worry and headaches out of choosing the right mutual for you. We are going to show you how to:

• Discover the right types of funds to help you reach your goals
• Find top funds by understanding their returns, expenses, tax implications and more
• Avoid the 3 common mistakes made by many investors that could cause thousands of dollars in losses
• Build a bigger nest egg over time by taking advantage of this major benefit of mutual fund investing
• Make sense of confusing IRS regs. Plus, you’ll get Daria’s famous Mutual Fund Record-Keeper to make record-keeping a snap.
• And more!

Let's jump right in with a look at the pros and cons of mutual funds so you know exactly what you're getting into.

The 4 Things We Really Like About Mutual Funds

There's a lot to like about mutual funds. That's why they're so popular! Here are the four biggest benefits you get when you invest in a mutual fund:

Diversification. Our mothers used to say, "Don't put all your eggs in one basket" — implying that spreading our wealth around would reduce our risk. As usual, Mom was right. That old adage is precisely the definition of diversification. By buying scores of stocks and/or bonds from different companies, a mutual fund manager is effectively spreading the risk around, eliminating too much reliance on any one investment.

Professional portfolio management. When you invest in a mutual fund, you are also buying professional money management — not only a portfolio manager, but often a whole staff of investment analysts. These folks are in the trenches, talking with company management and poring over financial statements; in short, doing the research that you just don't have the time for, or don't want to do.

Liquidity. With many mutual funds, it's a snap to buy or sell because they issue new shares and redeem existing shares on demand. These are called "open-end" funds, and you can buy or sell their shares on any business day. The price you pay equals the current market value of the fund's investments, divided by the number of shares outstanding. This gives you what's called the "net asset value" (NAV) per share, based on that day's closing prices. If you buy a mutual fund that charges a sales commission (called a "load"), you pay the closing price per share plus the sales charge.

Convenience. Most mutual funds have automatic investment plans. That makes it easy to make regular contributions to your fund by having money automatically withdrawn from your bank account and invested. They also offer automatic reinvestment plans so you can have your dividends and capital gains distributions poured right back into the fund to buy new shares. It doesn't get much easier than that!

What We Don't Like About Mutual Funds

So far, so good, right? What's not to love about an investment that's easy to use and gives you built-in diversification, expertise and convenience, right? But as with any investment, mutual funds have some shortcomings that can prove very costly in the long run if you don't know what to look for.

What Exactly Is a Mutual Fund?

One of the great things about mutual funds is that they give you the same diversification that well-heeled, big-time investors get from the stock and bond markets. With a mutual fund, you can invest in hundreds of stocks or bonds without a lot of money. A mutual fund is a pool of money managed by a professional money manager, known as the fund manager or portfolio manager. The fund manager invests your money — along with money from thousands (maybe millions) of other investors — in stocks, bonds and other securities, depending on the fund you choose. The fund manager buys investments with a specific, stated objective in mind. For example, some mutual funds invest in stocks for dividends, capital appreciation, or both. Some funds invest in bonds for steady income and some invest in a mixture of stocks and bonds for growth and income. As a shareholder of the fund, you reap your proportionate share of any gains (or losses) on investments held by the fund. Every investor gets the same return per share, whether you invest $1,000 or $100,000!

Here are the four biggest negatives you need to be aware of before you invest in any fund.

1. Costs and fees. You can end up paying fairly hefty fees for the services you get. Some mutual funds charge several types of fees: management fees, marketing fees and even fees to buy and redeem shares. These costs can range from 0.35% to more than 8% of the fund's assets per year, and are taken off the top of the fund's profits. You can see how high fees substantially reduce even the highest of returns, so it's imperative that you know exactly what fees you'll be paying before you buy. Don't worry; we'll show you exactly how to easily find this information in just a few minutes.

2. Capital gains taxes. None of us likes to pay taxes, but if you owe them, you must be making money, right? Not necessarily! You might find yourself saddled with a capital gains tax bill at the end of the year — even if your fund loses money! Why? Because the manager is constantly selling holdings, and every time he or she sells at a gain, you are taxed. We havegot some tips on this, too, which we'll talk about a little bit later.

3. The portfolio manager is playing with other people's money. Time for some Dolan straight talk on how the mutual fund industry really works: Most portfolio managers receive compensation and retain their jobs based on how well their fund performs in comparison to other funds in the same category — period. This pressure leads many of them to take all kinds of risks to keep their returns high. They might do a ton of buying and selling and hedging that they'd never do with their personal portfolio.

This can be an especially serious problem when the market starts going against a mutual fund. Some managers panic and dump stocks to try to keep the rate of return from falling. That creates a couple of problems: 1) It forces you to take losses that you might have avoided; and 2) Every time you buy and sell (and you know the manager will be buying something to replace the sold securities), you incur more fees.

4. Remember the diversification that we talked about? You may not be getting it after all! Although there are thousands of publicly traded companies, too many mutual fund managers are as guilty as individual investors of chasing popular stocks. Result: A lot of funds end up owning the same stocks. Here's why that's a big problem: If you own three mutual funds, you would naturally think you're diversified, when in fact you may be investing in the same stocks in three different funds — and paying three sets of fees!

To prevent this problem, make sure you take a look at the 10 top holdings in all of your funds. The easiest way to find this information is online, through the specific mutual fund company's web site or by getting a quote at one of the financial web sites like www.morningstar.com (enter the symbol, click on "Portfolio," and then click on the "Top 25 Holdings"). Once you compare the top holdings of your funds, you may find a lot of overlap!