"I can teach you almost everything you need to know about mutual funds in four pages." Between the growth of 401K retirement plans, personal investing and business investments, nearly everyone is touched by mutual funds today. Unfortunately, many of us have not received proper (or indeed any) investment education to help us make the most of our investment options. The need for mutual fund education cannot be ignored. The goal of this article is to teach you the basics of mutual fund investing with a special focus on institutional investors, such as credit unions. While the popularity of mutual funds has expanded greatly in the bull market of the 1990s, they are not a new invention. In fact, the first mutual fund company was created in Boston in 1924 and called the Massachusetts Investors Trust. The mutual fund industry has experienced tremendous growth, despite periods of volatility and financial setbacks. According to the Investment Company Institute (ICI), mutual funds grew from $ 1 billion in 1945 to $ 50 billion in the early 1970s. By the end of 1995, mutual funds had more than $2.8 trillion in assets. The 1990s witnessed an even greater surge in growth as an increasing number of people began to use mutual funds as savings vehicles, especially for retirement savings. According to the ICI, total mutual fund assets in the U.S. were over $6.95 trillion as of May 2001. This is nearly double what total assets were just five years ago when ICI year-end data for 1996 showed a total of 6,270 mutual funds had combined assets of $3.5 trillion. Eight years ago, in 1993, there were about 4,000 mutual funds that had total assets of $1.6 trillion (according to The Wall Street Journal guide to Understanding Money & Investing). So now that we know a little about the history and growth of mutual funds, let's answer the first question many people have, "What is a mutual fund?" A mutual fund is an investment company that uses "pooled" money from individual investors to buy multiple stocks, bonds or other securities through a professional investment manager. There are many types of mutual funds, each with its own investment objective. The three main types are: stock, bond, and money market funds. The amount you invest in a mutual fund is kept track of in shares or units and priced daily, similar to a stock or a bond. These units represent your ownership in the mutual fund. The price of each share is called the Net Asset Value (NAV) of the fund. The NAV is determined by dividing the number of shares by the current market value of the entire mutual fund portfolio. For example, if on a given day a mutual fund's total value is $1 million and 10,000 shares are outstanding, each share would be worth $100. Example $1,000,000 divided by 10,000 shares=$100 per share It is important to note here that when looking at the performance of a mutual fund, you need to consider more than just the NAV. So how is mutual fund performance measured? Two components make up the total return of a mutual fund investment. One is the income distributions paid to investors and the other is a rise or decline in the fund's NAV. Dividends are normally paid on bond mutual funds, while capital gains (which are profits from the fund's sale of a security that has increased in value) usually occur in stock or equity portfolios. The Total Return of a mutual fund is the complete performance picture; it looks at the current value of the fund (including the distributions paid and the change in net asset value) and divides that by the value of the initial investment that was made. Mutual funds are required to quote standardized total returns for a short (one-year period or less if the fund is new), mid-range (five-year period) and long range (ten-year period or since the fund's inception if the fund is not ten years old). By looking at the short, medium, and long-term performance ranges of a fund, you can determine its relative volatility over time and get a good idea of its past performance. Example: Dividend and Capital Gains Distributions + Changes in net asset value = Total Return The Potential Benefits of a Mutual Fund By pooling money from many investors, a mutual fund has greater buying power and can diversify its holdings. A mutual fund also offers professional investment management from a registered investment adviser, who generally has greater research capabilities and investment expertise than an individual investor. Mutual funds are designed to help make investing easier. Credit unions, specifically, can look forward to the following potential benefits, if they invest in mutual funds: Professional Investment Management - this could relieve some of the time pressure on your CFO Liquidity - generally same-day or next-day liquidity, depending on the time your redemption order is placed Ability to Choose a fund that's in line with your goals and objectives - there are thousands of mutual funds available, several of which are specifically designed for credit union investors. Convenient Reinvestment Options - investors can either reinvest dividends or receive dividend checks What about the risks? As with any other investment, there are risks associated with mutual fund investing. The value of your investment may fluctuate and returns are not guaranteed. Loss of principal is possible. The key to managing risk for yourself or your company is to know what your risk tolerance is and to choose a mutual fund that is in line with your objectives. For instance, investors who are looking for liquidity and may need to withdraw money on short notice should consider a money market fund, which seeks to preserve a stable net asset value of $1.00, while delivering more return than a savings account or other conservative investment options. Choosing a Mutual Fund As mentioned above, the best way to choose a mutual fund is to start by looking at your own goals. Know how much risk you can handle and what your objectives are. Do you want to invest money for the long-term? Then you should probably consider a more aggressive portfolio that includes stocks. Once you know what you want to achieve through investing, you can research the funds themselves to see which ones have objectives in line with your own. For institutions such as credit unions, the choices are fairly limited because of National Credit Union Administration ("NCUA") guidelines. This makes it a little easier to research the past performance, sales charges, fees, and future outlook of a mutual fund and their investment adviser. While past performance does not guarantee future results, it can help you compare similar investments and get an idea of how they have performed. Evaluating the investment strategy of the fund and its investment adviser is also a good way to compare funds with similar objectives. Most institutional funds are "no-load" meaning they do not have an initial sales charge. However, all funds have expenses (including investment advisory fees, operating expenses, and other applicable fees) which are detailed in their prospectus's. Comparing fees charged by different funds is also very important when making your final investment decision. For individual investors, the mutual fund universe can seem (and often is) just plain overwhelming. With 6,700 mutual funds to choose from, it is hard to know where to begin. That is where working with a professional financial adviser can come in handy. They know the mutual fund market and can help you sort through the sea of options to find funds that best suit your needs. Credit Unions and the Mutual Fund Industry Credit Unions had $2.8 billion in mutual funds as of March 30, 2001(Source: Callahan & Associates). As mentioned earlier, the scope of credit union investments is limited by NCUA guidelines. Several mutual funds do comply with these guidelines and offer money market and/or U.S. government securities funds to credit unions. To determine if a specific credit union may invest in mutual funds, you may consult with your state administrator and, of course, your internal investment rules to determine whether or not mutual funds are a permissible investment. Since credit unions are in business to serve their members, the investment decision-makers of credit unions have special considerations. After all, if they incur a loss it may negatively impact more than just themselves or the company, it may affect the membership. This is why it is important to take a comprehensive look at objectives, risk tolerance, and the quality of the mutual funds you purchase. The growth of mutual funds in the credit union industry has occurred in conjunction with the increase in mutual fund usage by the rest of the population. The 1980s witnessed the onslaught of new options aimed directly at credit union investors. In 1987, the Trust for Credit Unions ("TCU"), the first and largest mutual fund family designed exclusively for credit union investors, was created. TCU was founded by a partnership of fifteen credit unions and Callahan Financial Services, Inc. (a wholly-owned subsidiary of Callahan & Associates). The purpose was to create a purely credit union investment alternative. At the time, credit unions had very limited access to mutual funds because of NCUA and state regulations. The TCU was designed to comply with NCUA regulations and is also permissible in most states. The creation of the TCU portfolios allowed credit unions to take advantage of the liquidity, convenience, and professional management of mutual funds to help achieve their investment goals. Three portfolios were formed to offer a wide range of investment maturities to credit union investors. The TCU Money Market Portfolio was designed to provide daily liquidity and competitive rates compared to other overnight investments. The TCU Government Securities Portfolio was designed to work in the short/intermediate term but still be highly liquid. The NAV fluctuates as in any other similar investment. The TCU Mortgage Securities Portfolio has a somewhat longer duration and concentrates on mortgage-backed securities. One of the primary ways these funds benefit credit unions is through the diversification they provide. While a credit union can own any of the direct securities held by the portfolios, they would have a lot of difficulty matching the wide cross section of issues in each portfolio. This diversification provides a more stable environment as interest rates shift. The Callahan Credit Union Financial Services Limited Partnership (CUFSLP) is now made up of 39 credit unions and serves as the fund's administrator. Goldman Sachs Asset Management, a unit of the Investment Management Division of Goldman, Sach & Co. is the fund's investment adviser. Callahan Financial Services, Inc and Goldman Sachs & Co. serve as the distributors of the Portfolios. If you would like more information on any of these portfolios, please call 1-800-CFS-5678 or visit www.trustcu.com. Callahan Financial Services, Inc. and Goldman Sachs & Co. are co-distributors of the Trust for Credit Unions Portfolios. To request a prospectus which contains detailed fund information, including investment policies, risk considerations, charges and expenses, please call Callahan Financial Services, Inc. at 1-800-237-5678. Please read the prospectus carefully before investing or forwarding funds. Units of the Trust Portfolios are not endorsed by, insured by, obligations of, or otherwise supported by the U.S. government, the FDIC, the NCUSIF, the NCUA or any other government agency. An investment in the Portfolios involves risk, including possible loss of principal.