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Mutual Funds

Mutual Funds

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Published by: say2shekhar3062 on Nov 09, 2011
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mutual fund
is a professionally managed type of collective investment schemethat pools money from many investors to buystocks,  bonds, short-termmoney market  instruments, and/or other securities.
Types of mutual funds
There are three basic types of  registered investment companiesdefined in theInvestment Company Act of 1940:open-end funds,unit investment trusts(UITs); andclosed-end funds.exchange-traded funds(ETFs)are open-end funds or unit investment trusts that trade on an exchange.
] Open-end funds
Open-end mutual funds must be willing to buy back their shares from their investors atthe end of every business day at the net asset value computed that day. Most open-endfunds also sell shares to the public every business day; these shares are also priced at netasset value. A professional investment manager oversees the portfolio, buying and sellingsecurities as appropriate. The total investment in the fund will vary based on share purchases, redemptions and fluctuation in market valuation.
] Closed-end funds
Closed-end funds generally issue shares to the public only once, when they are createdthrough aninitial public offering.Their shares are then listed for trading on astock  exchange.Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares toanother investor in the market; the price they receive may be significantly different fromnet asset value. It may be at a "premium" to net asset value (meaning that it is higher thannet asset value) or, more commonly, at a "discount" to net asset value (meaning that it islower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate.
] Unit investment trusts
Unit investment trusts or UITs issue shares to the public only once, when they arecreated. Investors can redeem shares directly with the fund (as with an open-end fund) othey may also be able to sell their shares in the market. Unit investment trusts do not havea professional investment manager. Their portfolio of securities is established at thecreation of the UIT and does not change. UITs generally have a limited life span,established at creation.
[edit] Exchange-traded funds
Main article:Exchange-traded fund1
A relatively recent innovation, the exchange-traded fund or ETF is often structured as anopen-end investment company, though ETFs may also be structured as unit investmenttrusts, partnerships, investments trust, grantor trusts or bonds (as anexchange-tradednote
). ETFs combine characteristics of both closed-end funds and open-end funds. Likeclosed-end funds, ETFs are traded throughout the day on astock exchangeat a pricedetermined by the market. However, as with open-end funds, investors normally receivea price that is close to net asset value. To keep the market price close to net asset value,ETFs issue and redeem large blocks of their shares with institutional investors.Most ETFs are index funds.
The first mutual funds were established in Europe. One researcher credits a Dutchmerchant with creating the first mutual fund in 1774.
The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established inLondon in 1868. It is now theForeign & Colonial Investment Trustand trades on theLondon stock exchange.
Mutual funds were introduced into the United States in the 1890s.
They became popular during the 1920s. These early funds were generally of the closed-end type with a fixednumber of shares which often traded at prices above the value of the portfolio.
The first open-end mutual fund with redeemable shares, was established on March 21,1924. This fund, the Massachusetts Investors Trust, is now part of the MFS family of funds. However, closed-end funds remained more popular than open-end fundsthroughout the 1920s. By 1929, open-end funds accounted for only 5% of the industry's$27 billion in total assets.
After thestock market crash of 1929,Congresspassed a series of acts regulating the securities markets in general and mutual funds in particular. TheSecurities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered withtheSecurities and Exchange Commission (SEC) and that they provide prospective investors with a prospectus that discloses essential facts about the investment. The Securities and Exchange Act of 1934 requires that issuers of securities, including mutualfunds, report regularly to their investors; this act also created the Securities and ExchangeCommission, which is the principal regulator of mutual funds. TheRevenue Act of 1936  established guidelines for the taxation of mutual funds, while theInvestment CompanyAct of 1940governs their structure.When confidence in the stock market returned in the 1950s, the mutual fund industry began to grow again. By 1970, there were approximately 360 funds with $48 billion inassets.
The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically. The first retailindex fund, First2
Index Investment Trust, was formed in 1976 byThe Vanguard Group,headed byJohn Bogle; it is now called the Vanguard 500 Index Fundand is one of the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011.
Fund industry growth continued into the 1980s and 1990s, as a result of three factors: a bull marketfor both stocks and bonds, new product introductions (including tax-exempt  bond, sector, international and target datefunds) and wider distribution of fund shares.
Among the new distribution channels were retirement plans. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans, specificallyin401(k)and other  defined contribution plans and inindividual retirement accounts  (IRAs), all of which surged in popularity in the 1980s. Total mutual fund assets fell in2008 as a result of thecredit crisis of 2008.At the end of 2010, there were 7,581 mutual funds in the United States with combinedassets of $11.8 trillion, according to theInvestment Company Institute (ICI), a national trade association of investment companies in the United States. The ICI reports thatworldwide mutual fund assets were $4.7 trillion on the same date
Advantages of mutual funds
Mutual funds have advantages compared to direct investing in individual securities.
These include:
Increased diversification
Daily liquidity
Professional investment management
Ability to participate in investments that may be available only to larger investors
Service and convenience
Government oversight
Ease of comparison
Disadvantages of mutual funds
Mutual funds have disadvantages as well, which include
Less control over timing of recognition of gains
Less predictable income
 No opportunity to customize3

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