Liquidity is the ability to readily convert an investment into cash at any time without loss of original principal. For example, money market funds are considered to have great liquidity because they generally maintain a fixed value of one dollar* per share. Consequently, if you’re dependent on a money market account for near-term cash needs, you can be reasonably certain of immediate access to investment principal that will maintain its value. In short, liquidity implies safety, stability, and preservation of capital.

Your choice of funds should take income requirements over the near-term (1-5 years) into consideration. For example, bond funds generally produce a more predictable income stream than do common stock mutual funds. Many bond funds credit interest on at least a quarterly basis, some monthly. In contrast, stock funds typically make distributions semi-annually, which could include dividends on individual stocks and both short- and long-term capital gain distributions from the sale of securities. Capital gain distributions can vary significantly from year to year, depending on management decisions to sell or hold individual stocks. However, you could set up a periodic share redemption program in either a stock or bond fund to provide income by drawing down the account. Generally, the longer the anticipated holding period, the more risk you may be able to assume, because the historical long-term upward trend of the market has the potential to overcome short-term declines. However, you should not abandon your personal comfort level (risk tolerance) just because you have a longer investment time frame (say, 10 years).

Mutual funds make periodic taxable distributions (whether taken in cash or reinvested in additional shares), and selling fund shares is a taxable event (either capital gain or loss), if held in a taxable account. Although individual tax concerns vary, they should be an important part of your overall strategy. For example, if you have a long time horizon, moderate-to-high risk tolerance, and minimal short-term income requirements, you could minimize tax exposure by investing in funds that make minimal annual distributions and holding those funds indefinitely.

A Balancing Act
Generally, reasons for selling a fund may depend on whether or not a fund has underperformed relative to its peer group, or something has changed within your set of personal factors. That is, any change in risk tolerance, liquidity needs, income requirements, anticipated holding period, or tax exposure should trigger a reevaluation of a portfolio’s suitability.

However, bear in mind, past performance is not indicative of future results. In addition, shares may be redeemed for more or less than their original purchase price. Be sure to read the appropriate prospectus before investing in any security, which can be obtained from your investment executive.

The bottom line for any mutual fund investor is that a mutual fund portfolio should reflect individual circumstances, and should be monitored as those circumstances change.

*Yields will vary. An investment in a Fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.