Mutual fund
Mutual fund
Mutual fund is a form of collective investment that pools money from many
investors and invests their money in stocks, bonds, short-term money market
instruments, and other securities. In a mutual fund, the manager trades the fund’s
underlying securities, realizing capital gains or losses, and collects the dividend or
interest income. The investment proceeds are then passed along to the individual
investors.
Mutual funds are purchased either: directly from a company or indirectly from a
sales agent, including securitie firms, banks and financial planners.
Usage of Mutual ffund
Mutual funds can invest in many different kinds of securities. The most common
are cash, stock, and bonds, but there are a lot of sub-categories. Stock funds, can
invest primarily in the shares of a particular industry, such as technology or utilities.
These are called sector funds.
Most mutual funds’ investment portfolios are continually adjusted by a
professional manager, who forecasts the future performance of investments
appropriate for the fund. A mutual fund is administered through a main management
company, which may hire or fire fund managers.
Mutual ffunds are subject to a special set of regulatory, accounting, and tax rules.
They are not taxed on their income as long as they distribute substantially all of it to
their shareholders. Also, the type of income they earn is often unchanged aas it passes
through to the shareholders. Mutual fund distributions of tax-free municipal bond
income are also tax-free to the shareholder.
Types of mutual funds
The term mutual fundis the name for an open-end investment company. Open-end
means that, at the end of a day, the fund issues new shares to investors and buys back
shares from investors wishing to leave the fund. Mutual funds can be structured as
corporations or business trusts.
Exchange-traded funds
The exchange traded fund (ETF), is often formulated as an open-end investment
company. ETFs is made of mutual funds and closed-end funds. An ETF usually tracks
a stock index. Shares are issued by institutional investors in large blocks. Investors
purchase shares in small quantities through brokers at a small discount to the net asset
value; this is how tthe institutional investor makes its profit. ETFs are more efficient
than traditional mutual funds and therefore tend to have lower expenses. ETFs are
traded throughout the day on a stock exchange, just like closed-end funds.
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Equity funds
Equity funds, are the most common type of mutual fund. Often equity funds focus
investments on particular strategies and certain types of issuers. A stock fund or also
known as an equity fund is a fund that invests in stocks. These funds are typically
held in stock or cash.. TThe objective of an equity fund is long-term growth through
capital appreciation, dividends and interest are also sources of revenue.
Bond funds
Bond funds account for 18% of mutual fund assets. Types of bond funds includs:
• term-funds, which have a fixed set of time before they mature.
• Municipal bond funds generally have lower returns, but have tax advantages
and lower risk.
• High-yield bond funds invest in corporate bonds, including high-yield or junk
bonds. These bonds also come with greater risk.
Money market funds
Money market funds are also known as the safest kind of mutual fund, however
their returns are so low, that they can’t beat inflation over time. Your money buying
power becomes less valuable in a long run.
A major innovation in the investment company industry has been the creation, and
subsequent phenomenal growth of money market funds, which are open-end
investment companies whose portfolios consist of money market instruments.
The reason money funds are so stable is because they invest in short-term
securities like those issued by banks, the federal government or big companies. A big
advantage of a money fund is that it is completely liquid. You can sell your shares in a
money fund at any time. Money market can be divided into two main groups: taxable
funds and tax-exempt funds.
Funds of ffunds
Funds of funds (FoF) are mutual funds which invest in other underlying mutual
funds. These funds are typically funds which an investor can invest individually. It
will charge a management fee which is smaller than that of a normal. The fund should
be evaluated on the combination of the fund-level expenses and underlying fund
expenses.
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Hedge funds
“Hedge funds are funds which uses aggressive investing strategies to seek higher
returns. These funds are restricted by law to no more than 100 investors per fund, and
as a result most hedge funds set exceptionally high minimum investment amounts. As
with traditional mutual funds, investors in hedge funds pay a management fee. These
funds also collect a percentage of the profits (usually 20%).”
Mutual Fund Basics, Less Popular Types of Mutual Funds – Part 1, by Investor Guide
Staff
Advantages of Mutual Funds:
In conclusion I would like to say that mutual funds is the right thing to choose
because, first of all you are facing with a professional management of your money.
Investors purchase funds because usually they do not have the time to manage their
own portfolio.
Secondly, diversification, main idea about it is to invest into a large number of assets
so that a loss in any particular investment would be a minimum.
Finally one of the biggest aadvantages is simplicity , because buying a mutual fund is
easy and the minimum investment is small.
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References
Mark Carhart (March 1997). „On Persistence in Mutual Fund Performance“. Journal
of Finance 52 (1): 56-82.
M. Grimblatt and S. Titman (1989). „Mutual Fund Performance: an Analysis of
HedgYour Christine Benz. Which Is the Right Fund Share Class for You?
Morningstar (registration required). Retrieved on 2006-04-11.
Sources of Information Invest Wisely: An Introduction to Mutual Funds U.S.
Securities and Exchange Commission. (SEC). Retrieved on 2006-04-11.
“Investments:analysis and management” 9th edition ( Charles P. Jones) N.J.: John
Willey & sons, c2004
U.S. Indexes: Construction and methodology. Retreived on 2006-04-23
Hedging your bets: A Heads up on Hedge Funds and Funds of Hedge Funds U.S.
Securities and Exchange Commission (SEC). Retrieved on 2006-04-11.
AC111 Introduction to accounting and finance
