What is a Mutual Fund?

Investments may take many forms. Some people buy and sell stocks and bonds while others purchase real estate. Another common investment tool is a mutual fund.

Mutual Funds are pools of money managed by an investment company and regulated by the Securities and Exchange Commission under the Investment Company Act of 1940. According to the Investment Company Institute, there are over 8,000 mutual fund choices in the United States today controlling close to $7 trillion in assets1. The investment company uses the assets in the fund to buy and sell securities such as stocks or bonds in pursuit of a specific objective as outlined by the company charter. The fund objectives and other important information are found in the prospectus. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

One objective a mutual fund may attempt to achieve is long-term growth of capital. This may be done by purchasing the stock of large companies that have consistently made a profit, or buying the inexpensive stock of smaller companies in hopes that the value increases. Some funds may be invested primarily in foreign companies2 while others invest in specific market sectors such as technology or health care.

Some funds are developed to generate income for the investors. Dividends from bonds or preferred stocks held by these funds are accumulated and distributed to investors on a regular basis. If the fund's assets are invested in municipal bonds, the dividends may be exempt from federal taxes, which would provide the investor with income taxed solely at the state or local level.

Many funds are actively managed, meaning an experienced investment advisor will take an active role in determining the portfolio, or holdings, of the fund. The securities held in a fund may change based on how well a security performs and meets the objective of the fund.

Other funds are called indexed funds and attempt to mirror the performance of a given index, such as the S&P 500®3 or the Russell 2000®4 Indexes. The fund portfolio will generally contain stocks of as many companies in the index as is possible in amounts reflecting the weighting assigned by the index.

A person wishing to invest in a mutual fund should obtain the fund's prospectus and read it carefully. There are a number of risks associated with investing and how a person should invest depends on their tolerance to those risks.

1Investment Company Institute, Mutual Fund Fact Book, March 2001.

2Investing in foreign securities involves risks not normally associated with investing in the U.S. including higher trading and custody costs, less stringent accounting, legal and reporting practices, potential for political and economic instability, and the fluctuation and potential regulation of currency exchange and exchange rates.

3"S&P 500®" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by the State Farm Mutual Fund Trust. The State Farm S&P 500 Index Fund (the "Fund") is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund.

4The Russell 2000® Index is a trademark/service mark, and RussellTM is a trademark of the Frank Russell Company. The State Farm Small Cap Index Fund (the "Fund") is not sponsored, endorsed, sold or promoted by, nor in any way affiliated with the Frank Russell Company. Frank Russell Company is not responsible for and has not reviewed the Fund nor any associated literature or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.


State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 260 KB) .


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