Mutual funds pool the money of many investors into one professionally managed portfolio of stocks, bonds or other securities. Most 401(k) plans will provide you with a list of mutual funds that the plan invests in and allow you to allocate your savings between them.

In addition to being a key part of your 401(k) investment, mutual funds have many advantages over individual securities:

• Professional money managers research, select and monitor the securities that the fund purchases.
• Mutual funds offer instant diversification by allowing you to invest in many different securities of different types, sizes, industries and countries at one time. Diversification is important when trying to keep your investment return high and your total risk low.
• Mutual fund shares are highly liquid because the fund is required to buy back the shares at the current net asset value.
• Many mutual funds also have no minimum purchase requirements, making them available to investors of various sizes.
• When investing in mutual funds there are many things to consider:
• The type of fund you want to invest in. This is typically determined by your investment goals and risk tolerance. Mutual funds have a stated objective that relates to factors such as the size of the companies invested in (small cap versus large cap), the type of securities invested in (stocks versus bonds), where the companies are located (domestic versus international) or the amount of risk the fund targets.
• The fees and expenses charged by the fund. Funds charge a variety of fees that are set at different percentages. It is important to understand and compare what fees the fund is charging since fees lower your return on investment. Two key aspects to compare are the fund's expense ratio and its sales load structure. The expense ratio is the percent of your investment that is paid to the fund annually for operating expenses and management fees and is typically between 0.5 percent and 1.5 percent. Sales loads can be charged at purchase, redemption or both and are between zero percent and 8.5 percent; no-load funds do not charge a sales load, but will still have annual operating fees.
• Which class to invest in. Most mutual funds have three classes (A, B and C) available to individual investors that offer different fee and expense structures, but all invest in the same portfolio.
• It is also important to remember that past fund performance is not a guarantee of future performance and that investing in mutual funds has tax consequences.

Check out www.morningstar.com or the fund's prospectus for more information on specific mutual funds; or try www.sec.gov/investor/pubs/inwsmf.htm for more general information.

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