A Mutual Fund is a Professionally Managed | Mutual Funds | Exchange Traded Fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy

stocks, bonds, short-term money market instruments, and/or other securities.

Overview
In the United States, a mutual fund is registered with the Securities and Exchange Commission (SEC) and is overseen by a board of directors (if organized as a corporation) or board of trustees (if organized as a trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. The fund manager, also known as the fund sponsor or fund management company, trades (buys and sells) the fund's investments in accordance with the fund's investment objective. A fund manager must be a registered investment advisor. Funds that are managed by the same fund manager and that have the same brand name are known as a "fund family" or "fund complex". The Investment Company Act of 1940 (the 1940 Act) established three types of registered investment companies or RICs in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds. Recently, exchange-traded funds (ETFs), which are open-end funds or unit investment trusts that trade on an exchange, have gained in popularity. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type. Hedge funds are not considered a type of mutual fund. While they are another type of commingled investment scheme, they are not governed by the Investment Company Act of 1940 and are not required to register with the Securities and Exchange Commission (though many hedge fund managers now must register as investment advisors). Mutual funds are not taxed on their income as long as they comply with certain requirements established in the Internal Revenue Code. Specifically, they must diversify their investments, limit ownership of voting securities, distribute most of their income to their investors annually, and earn most of the income by investing in securities and currencies.[2] Mutual funds pass taxable income on to their investors. The type of income they earn is unchanged as it passes through to the shareholders. For example, mutual fund distributions of dividend income are reported as dividend income by the investor. There is an exception: net losses incurred by a mutual fund are not distributed or passed through to fund investors. Outside of the United States, mutual fund is used as a generic term for various types of collective investment vehicles available to the general public, such as unit trusts, open-ended investment companies, unitized insurance funds, Undertakings for Collective Investment in Transferable Securities, and SICAVs.

[edit] Advantages
Mutual funds have advantages compared to direct investing in individual securities.[3] These include:

[6] Mutual funds were introduced into the United States in the 1890s. is now part of the MFS family of funds. The Securities and Exchange Act of 1934 requires that issuers of securities. closed-end funds remained more popular than open-end funds throughout the 1920s. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio.y y y y y y y 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 [edit] Disadvantages Mutual funds have disadvantages as well. report regularly to their investors. The Securities Act of 1933 requires that all investments sold to the public. including mutual funds. Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. When confidence in the stock market returned in the 1950s. there were approximately 360 funds with $48 billion in assets.[5] The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust. which is the principal regulator of mutual funds. 1924. which include[4]: y y y y Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize [edit] History The first mutual funds were established in Europe. while the Investment Company Act of 1940 governs their structure. One researcher credits a Dutch merchant with creating the first mutual fund in 1774.[8] The first open-end mutual fund with redeemable shares was established on March 21. This fund. including mutual funds. open-end funds accounted for only 5% of the industry's $27 billion in total assets. the mutual fund industry began to grow again. be registered with the Securities and Exchange Commission and that they provide prospective investors with a prospectus that discloses essential facts about the investment. By 1970. this act also created the Securities and Exchange Commission. which was established in London in 1868. It is now the Foreign & Colonial Investment Trust and trades on the London stock exchange. the Massachusetts Investors Trust.[9] After the stock market crash of 1929.[7] They became popular during the 1920s. The Revenue Act of 1936 established guidelines for the taxation of mutual funds. By 1929.[10] The introduction of money market funds in the high interest rate environment of the late 1970s . However.

Some fund management companies allowed favored investors to engage in late trading. a national trade association of investment companies in the United States.[13] [edit] Leading complexes At the end of October 2011. Exchangetraded funds are open-end funds or unit investment trusts that trade on an exchange. which is a practice prohibited by fund policy. unit investment trusts. . At the end of 2010.[11] Fund industry growth continued into the 1980s and 1990s. 2011. T. JPMorgan 8. as a result of three factors: a bull market for both stocks and bonds.8 trillion. the top 10 mutual fund complexes in the United States were:[14] 1. with more than $100 billion in assets as of January 31. international and target date funds) and wider distribution of fund shares. new product introductions (including tax-exempt bond. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans. headed by John Bogle. The scandal was initially discovered by then-New York State Attorney General Eliot Spitzer and resulted in significantly increased regulation of the industry. or market timing. Rowe Price 10. according to the Investment Company Institute (ICI). specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs). sector. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008. The first retail index fund. American Funds (Capital Research) 4.7 trillion on the same date. SSgA 9. First Index Investment Trust. which is illegal. Federated [edit] Types There are three basic types of registered investment companies defined in the Investment Company Act of 1940: open-end funds. was formed in 1976 by The Vanguard Group. and closed-end funds. all of which surged in popularity in the 1980s. Franklin Templeton 7. it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds. PIMCO 6. there were 7. The ICI reports that worldwide mutual fund assets were $24. Fidelity 3. the mutual fund industry was involved in a scandal involving unequal treatment of fund shareholders.[12] Among the new distribution channels were retirement plans.boosted industry growth dramatically.581 mutual funds in the United States with combined assets of $11. Vanguard 2. In 2003. BlackRock 5.

as with open-end funds. A professional investment manager oversees the portfolio. The total investment in the fund will vary based on share purchases. Their portfolio of securities is established at the creation of the UIT and does not change. investments trust. when they are created. partnerships. Investors can redeem shares directly with the fund (as with an open-end fund) or they may also be able to sell their shares in the market. A professional investment manager oversees the portfolio. these shares are also priced at net asset value. ETFs are traded throughout the day on a stock exchange at a price determined by the market. the price they receive may be significantly different from net asset value. Their shares are then listed for trading on a stock exchange. UITs generally have a limited life span. more commonly. ETFs combine characteristics of both closed-end funds and open-end funds. Unit investment trusts do not have a professional investment manager. though ETFs may also be structured as unit investment trusts. when they are created through an initial public offering. [edit] Exchange-traded funds Main article: Exchange-traded fund A relatively recent innovation. [edit] Closed-end funds Closed-end funds generally issue shares to the public only once. Instead. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or. at a "discount" to net asset value (meaning that it is lower than net asset value). share redemptions and fluctuation in market valuation. ETFs issue and redeem large blocks of their shares with institutional investors. buying and selling securities as appropriate. the exchange-traded fund or ETF is often structured as an openend investment company. However. 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). There is no legal limit on the number of shares that can be issued. [edit] Investments and classification . To keep the market price close to net asset value. investors normally receive a price that is close to net asset value. they must sell their shares to another investor in the market. buying and selling securities as appropriate. Like closed-end funds. Most ETFs are index funds.[edit] Open-end funds Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. grantor trusts or bonds (as an exchange-traded note). Most open-end funds also sell shares to the public every business day. established at creation. [edit] Unit investment trusts Unit investment trusts or UITs issue shares to the public only once.

from the alternative minimum tax and from taxes in the state of New Jersey. which are fixed income securities with a very short time to maturity and high credit quality. Only two money market funds have ever broken the buck: Community Banker's U. rather than from dividend or interest income. The four largest categories of funds are money market funds. stock or equity funds and hybrid funds. a "capital appreciation" fund generally looks to earn most of its returns from increases in the prices of the securities it holds. it is said to "break the buck". the "ABC New Jersey Tax-Exempt Bond Fund" would generally have to invest. unlike bank savings accounts. Investors often use money market funds as a substitute for bank savings accounts. Bond funds may invest in primarily U. investment approach or specific focus. mutual funds. Bond funds can be subclassified according to the specific types of bonds owned (such as high-yield or junk bonds. though money market funds are not government insured. under normal circumstances. investment approach and permitted investments. Money market funds strive to maintain a $1.S. The types of securities that a particular fund may invest in are set forth in the fund's prospectus. investment-grade corporate bonds. money market funds accounted for 24% of the assets in all U. who are employed by the fund's manager or sponsor. The investment approach describes the criteria that the fund manager uses to select investments for the fund. For example.S.S. Mutual funds are classified by their principal investments. At the end of 2010.Mutual funds may invest in many kinds of securities. A mutual fund's investment portfolio is continually monitored by the fund's portfolio manager or managers.[15] Bond. funds may be subclassified by investment objective. Government Money Market Fund in 1994 and the Reserve Primary Fund in 2008.or long-term). government bonds or municipal bonds) or by the maturity of the bonds held (short-. The investment objective describes the type of income that the fund seeks. which describes the fund's investment objective. For example.[13] [edit] Bond funds Bond funds invest in fixed income securities. intermediate. meaning that investors earn interest income from the fund but do not experience capital gains or losses. at least 80% of its assets in bonds that are exempt from federal income tax. Within these categories. The SEC requires that mutual fund names not be inconsistent with a fund's investments. bond or fixed income funds. stock and hybrid funds may be classified as either index (passively-managed) funds or actively-managed funds. If a fund fails to maintain that $1. [edit] Money market funds Money market funds invest in money market instruments. securities (domestic or .00 per share because its securities have declined in value.00 per share net asset value.

growth vs.S.[13] [edit] Stock or equity funds Stock or equity funds invest in common stocks. value).S.S. The two dimensions are often displayed in a grid known as a "style box. At the end of 2010. A stock fund may be subclassified along two dimensions: (1) market capitalization and (2) investment style (i. in both U. Each company's market capitalization equals the number of shares outstanding times the market price of the stock.S. Balanced funds. small cap stocks have market capitalizations below $2 billion. based on the value of the company's stock.S.. They may focus on a specific industry or sector. asset allocation funds. At the end of 2010. Blend funds are not biased toward either growth or value. Stock funds are also subclassified according to their investment style: growth. target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid funds. or primarily foreign securities (international funds). large cap stocks generally have market capitalizations of at least $10 billion. Value funds seek to invest in stocks that appear cheaply priced.e. stock funds accounted for 48% of the assets in all U." Market capitalization or market cap indicates the size of the companies a fund invests in. value or blend (or core).U. bond funds accounted for 22% of the assets in all U. funds).S. funds). Funds are also classified in these categories based on the market caps of the stocks that it holds. in both U. and micro cap stocks have market capitalizations below $300 million. and foreign securities (global or world funds). mutual funds. Stock funds may invest in primarily U. or primarily foreign securities (international funds).S. and foreign securities (global or world funds). securities (domestic or U. Market capitalizations are typically divided into the following categories: y y y y Micro cap Small cap Mid cap Large cap While the specific definitions of each category vary with market conditions. mutual funds.[13] [edit] Hybrid funds Hybrid funds invest in both bonds and stocks or in convertible securities. Growth funds seek to invest in stocks of fast-growing companies. . blend/core vs.

The back-end loads may decline the longer the investor holds shares." The front-end load often declines as the amount invested increases. other fund expenses.S.[13] [edit] Index (passively-managed) versus actively-managed Main articles: Index fund and active management An index fund or passively-managed fund seeks to match the performance of a market index. which is paid by the investor when shares are redeemed depending on how long they are held. while an actively managed fund seeks to outperform a relevant index through superior security selection. through breakpoints. It is expressed as a percentage of the total amount invested (including the frontend load). These fall into four categories: distribution charges (sales loads and 12b-1 fees). others are paid by the fund and reduce net asset value. the management fee. [edit] 12b-1 fees . hybrid funds accounted for 6% of the assets in all U. Front-end loads are deducted from an investor's account and reduce the amount invested. [edit] Front-end load or sales charge A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares are purchased. back-end loads are deducted from an investor's account. Like front-end loads. such as the S&P 500 index. Back-end loads with this structure are called contingent deferred sales charges (or CDSCs). Some of these expenses reduce the value of an investor's account. meaning that they invest by buying shares in other mutual funds that invest in securities. known as the "public offering price. Recurring expenses are included in a fund's expense ratio. [edit] Back-end load Some funds have a back-end load. although some invest in unaffiliated funds (meaning those managed by other fund sponsors) or in a combination of the two. At the end of 2010. mutual funds. [edit] Distribution charges Main article: Mutual fund fees and expenses Distribution charges pay for marketing and distribution of the fund's shares to investors. [edit] Expenses Investors in mutual funds pay fees. shareholder transaction fees and securities transaction fees. Most fund of funds invest in affiliated funds (meaning mutual funds managed by the same fund sponsor).Hybrid funds may be structured as funds of funds.

Class B shares usually convert automatically to Class A shares after they have been held for a certain period. combined with a high 12b-1 fee. All of the shares classes invest in the same portfolio of securities. provides the portfolio management or investment advisory services and normally lends its brand name to the fund. known as share classes. The 12b-1 fee is included in the expense ratio. [edit] Management fee The management fee is paid to the fund manager or sponsor who organizes the fund. Class I are subject to very high minimum investment requirements and are. Class R are for use in retirement plans such as 401(k) plans. Neither class of shares charges a front-end or back-end load. but each has different expenses and. Class B shares don't have a front-end sales load. a different net asset value and different performance results. known as a 12b-1 fee. subject to a maximum of 1% of assets. Typical share classes for funds sold through brokers or other intermediaries are: y y y y y Class A shares usually charge a front-end sales load together with a small 12b-1 fee. or CDSC that declines gradually over several years. therefore. The fund manager may also provide other administrative services. No-load funds often have two classes of shares: y y Class I shares do not charge a 12b-1 fee. Instead they. Class C shares usually do not convert to another class. back-end loads and 12b-1 fees. This fee is computed as a percentage of a fund's assets. but do charge a small 12b-1 fee.A mutual fund may charge an annual fee.25% of fund assets. Some of these share classes may be available only to certain types of investors. which means that it declines as assets (in either the specific fund or in the . They are no-load shares. They do not charge loads. by offering several different types of shares. Class C shares have a high 12b-1 fee and a modest contingent deferred sales charge that is discontinued after one or two years. have a high contingent deferred sales charge. [edit] No-load funds A no-load fund does not charge a front-end load under any circumstances. does not charge a back-end load under any circumstances and does not charge a 12b-1 fee greater than 0. They are often called "level load" shares.25% of fund assets. Class N shares charge a 12b-1 fee of no more than 0. known as "institutional" shares. [edit] Share classes A single mutual fund may give investors a choice of different combinations of front-end loads. therefore. The management fee often has breakpoints. for marketing and distribution services.

[edit] Securities transaction fees A mutual fund pays any expenses related to buying or selling the securities in its portfolio. The expense ratio equals the 12b-1 fee plus the management fee plus the other fund expenses divided by average net assets. [edit] Shareholder transaction fees Shareholders may be required to pay fees for certain transactions. The expense ratio is sometimes referred to as the "total expense ratio" or TER. Shareholder transaction fees are not part of the expense ratio. [edit] Expense ratio The expense ratio allows investors to compare expenses across funds. so that it is difficult for investors to reduce the fees that they pay. . They believe that the market for mutual funds is not competitive and that there are many hidden fees. [edit] Controversy Critics of the fund industry argue that fund expenses are too high. They do not flow through the income statement and are not included in the expense ratio. These expenses may include brokerage commissions. The management fee is paid by the fund and is included in the expense ratio. redemption fees are computed as a percentage of the sale amount.fund family as a whole) increase. Securities transaction fees increase the cost basis of the investments. [edit] Other fund expenses A mutual fund pays for other services including: y y y y y y y Board of directors' (or board of trustees') fees and expenses Custody fee: paid to a bank for holding the fund's portfolio in safekeeping Fund accounting fee: for computing the net asset value daily Professional services fees: legal and accounting fees Registration fees: when making filings with regulatory agencies Shareholder communications expenses: printing and mailing required documents to shareholders Transfer agent services fee: keeping shareholder records and responding to customer inquiries These expenses are included in the expense ratio. The amount of securities transaction fees paid by a fund is normally positively correlated with its trading volume or "turnover". For example. 60 or 90 days of purchase). Some funds charge redemption fees when an investor sells fund shares shortly after buying them (usually defined as within 30. a fund may charge a flat fee for maintaining an individual retirement account for an investor.

The fund's board of directors (or board of trustees) oversees security valuation. 5-. T = average annual total return. or 10-year periods at the end of the 1-. It is usually expressed as a per-share amount. Funds must compute their net asset value every day the New York Stock Exchange is open. [edit] Turnover Turnover is a measure of the volume of a fund's securities trading. ERV = ending redeemable value of a hypothetical $1. If the period is less than a year.Many researchers have suggested that the most effective way for investors to raise the returns they earn from mutual funds is to reduce the fees that they pay. 5-.000 payment made at the beginning of the 1-. computed by dividing by the number of fund shares outstanding.000. Valuing the securities held in a fund's portfolio is often the most difficult part of calculating net asset value. [edit] Net asset value or NAV Main article: Net asset value A fund's net asset value or NAV equals the current market value of a fund's holdings minus the fund's liabilities (sometimes referred to as "net assets"). 5-year and 10-year periods using the following formula:[16] P(1+T)n = ERV Where: P = a hypothetical initial payment of $1. the turnover figure is annualized. [edit] Average annual total return The SEC requires that mutual funds report the average annual compounded rates of return for 1year. Turnover equals the lesser of a fund's purchases or sales during a given period (of no more than a year) divided by average net assets. It is expressed as a percentage of net asset value and is normally annualized. n = number of years. They suggest that investors look for no-load funds with low expense ratios. . or 10-year periods (or fractional portion). [edit] Definitions Definitions of key terms.

The SEBI approval Always look out for those companies that have been approved by the SEBI. Deal only with registered intermediaries. This objective helps you choose between schemes that satisfy different objectives. That¶s why. company history. promoters. That's why it is best to not be influenced by such volatile investment areas. it may be smarter to trust options that offer a professional management of investments. Picking the Right Mutual Fund Mutual Funds are a great way to invest if you do not have the time or the expertise to invest in the stock market directly. for example Mutual Funds. And a good broker might be the difference between a good. money-losing investment. Although you may be tempted to make your own investments. safe investment and a bad. Though it may be lengthy. Read carefully Read the offer document carefully before investing. litigations. it is important to deal with brokers who are registered with the regulatory authorities. project. There are times when a sector is performing amazingly well and times when the same sector might be in a downtrend. The regulations laid down by the SEBI make for wiser investments with an official corroboration. Since there are several mutual funds and schemes in the market. You may need a broker to invest in many financial instruments. objects of the issue and key financial data. Conduct your own research. . Don't hesitate to approach professionals. you must at least read the sections on risk factors. y Riding it Out Avoid volatile sectors. Go for safer and less risky options like investing in a Mutual Fund.y y At the Outset Notes to Self Have an 'Investment Objective' Create for yourself an objective to perform wiser investments. it is important to select the right one for you.

The Risk Quotient Just because mutual funds are less risky. But take professional help and ensure that you select a scheme that best meets your investment objective. . Keeping Track Once you have invested in a particular scheme under a mutual fund. it doesn¶t make them completely devoid of risk. Some schemes are riskier than others and may not necessarily result in expected gains.There are various schemes in the market which may seem lucrative or even promise guaranteed returns. it is important that you keep regular track of the NAV (Net Asset Value) of that particular scheme. This will keep you updated and will avert surprises.

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