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This article is about mutual funds in the United States. For other forms of mutual investment, see Collective investment scheme.
The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (September 2011)
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.
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. 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
which was established in London in 1868.  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
of mutual funds
Mutual funds have disadvantages as well. Mutual funds were introduced into the United States in the 1890s. mutual fund is used as a generic term for various types of collective investment vehicles available to the general public.
of mutual funds
Mutual funds have advantages compared to direct investing in individual securities. the Massachusetts Investors Trust. 1924. 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.income are reported as dividend income by the investor. This fund. unitized insurance funds. open-ended investment companies. The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust. Outside of the United States. which include:
Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize
The first mutual funds were established in Europe. such as unit trusts. is now part of the MFS family of funds. There is an exception: net losses incurred by a mutual fund are not distributed or passed through to fund investors. The first open-end mutual fund with redeemable shares was established on March 21. However. It is now the Foreign & Colonial Investment Trust and trades on the London stock exchange. Undertakings for Collective Investment in Transferable Securities. One researcher credits a Dutch merchant with creating the first mutual fund in 1774. and SICAVs. They became popular during the 1920s. closed-end funds remained
4. all of which surged in popularity in the 1980s. By 1970. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008.7 trillion on the same date. At the end of 2010. while the Investment Company Act of 1940 governs their structure. The Revenue Act of 1936established guidelines for the taxation of mutual funds. The Securities Act of 1933 requires that all investments sold to the public. this act also created the Securities and Exchange Commission. sector. including mutual funds. 3. the top 10 mutual fund complexes in the United States were: 1. The Securities and Exchange Act of 1934 requires that issuers of securities. new product introductions (including tax-exempt bond. 
mutual fund complexes
At the end of 2009. Fidelity Investments Vanguard Group Capital Research & Management (American Funds) JP Morgan Chase & Co. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans. When confidence in the stock market returned in the 1950s. there were 7.
. as a result of three factors: a bull market for both stocks and bonds. First Index Investment Trust. was formed in 1976 by The Vanguard Group. Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. the mutual fund industry began to grow again. After the stock market crash of 1929.more popular than open-end funds throughout the 1920s.581 mutual funds in the United States with combined assets of $11. Fund industry growth continued into the 1980s and 1990s. The ICI reports that worldwide mutual fund assets were $4. 2011. By 1929. with more than $100 billion in assets as of January 31. a national trade association of investment companies in the United States. be registered with the Securities and Exchange Commission and that they provide prospective investors with a prospectus that discloses essential facts about the investment. The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically.8 trillion. international and target date funds) and wider distribution of fund shares. report regularly to their investors. headed by John Bogle. according to the Investment Company Institute (ICI). there were approximately 360 funds with $48 billion in assets. Among the new distribution channels were retirement plans. The first retail index fund. including mutual funds. it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds. open-end funds accounted for only 5% of the industry's $27 billion in total assets. specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs). which is the principal regulator of mutual funds. 2.
established at creation. when they are created. Their portfolio of securities is established at the creation of the UIT and does not change. Goldman Sachs & Co. unit investment trusts.
Closed-end funds generally issue shares to the public only once.
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.5. A professional investment manager oversees the portfolio. 6. at a "discount" to net asset value (meaning that it is lower than net asset value). Most open-end funds also sell shares to the public every business day.
Unit investment trusts or UITs issue shares to the public only once. more commonly. A professional investment manager oversees the portfolio.
of mutual funds
There are three basic types of registered investment companies defined in the Investment Company Act of 1940: open-end funds. they must sell their shares to another investor in the market. There is no legal limit on the number of shares that can be issued. and closed-end funds.
. 7. 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). It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or. when they are created through an initial public offering. 9. the price they receive may be significantly different from net asset value. buying and selling securities as appropriate. Instead. 8. UITs generally have a limited life span. these shares are also priced at net asset value. 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. share redemptions and fluctuation in market valuation. buying and selling securities as appropriate.
Black Rock Funds PIMCO Funds Franklin Templeton Investments Federated Investors Bank of New York Mellon
10. The total investment in the fund will vary based on share purchases. Their shares are then listed for trading on a stock exchange. Unit investment trusts do not have a professional investment manager. Exchange-traded funds are open-end funds or unit investment trusts that trade on an exchange.
For example. Mutual funds are classified by their principal investments. though ETFs may also be structured as unit investment trusts.
. The types of securities that a particular fund may invest in are set forth in the fund's prospectus. who are employed by the fund's manager or sponsor. grantor trusts or bonds (as an exchange-traded note). For example. Bond. bond or fixed income funds. stock or equity funds and hybrid funds. rather than from dividend or interest income. ETFs are traded throughout the day on a stock exchange at a price determined by the market. investment approach or specific focus. ETFs combine characteristics of both closed-end funds and open-end funds. stock and hybrid funds may be classified as either index (passively-managed) funds or actively-managed funds. a "capital appreciation" fund generally looks to earn most of its returns from increases in the prices of the securities it holds. which describes the fund's investment objective. The SEC requires that mutual fund names not be inconsistent with a fund's investments. though money market funds are not government insured. The investment approach describes the criteria that the fund manager uses to select investments for the fund. the exchange-traded fund or ETF is often structured as an open-end investment company. which are fixed income securities with a very short time to maturity and high credit quality. Most ETFs are index funds. investment approach and permitted investments.Main article: Exchange-traded fund A relatively recent innovation. Investors often use money market funds as a substitute for bank savings accounts. from the alternative minimum tax and from taxes in the state of New Jersey. as with open-end funds. partnerships. Like closed-end funds. the "ABC New Jersey TaxExempt Bond Fund" would generally have to invest.
Mutual funds may invest in many kinds of securities. unlike bank savings accounts. The investment objective describes the type of income that the fund seeks. To keep the market price close to net asset value. investments trust. funds may be subclassified by investment objective. Within these categories. at least 80% of its assets in bonds that are exempt from federal income tax. under normal circumstances.
Money market funds invest in money market instruments. investors normally receive a price that is close to net asset value. ETFs issue and redeem large blocks of their shares with institutional investors. However. A mutual fund's investment portfolio is continually monitored by the fund's portfolio manager or managers. The four largest categories of funds are money market funds.
Bond funds can be subclassified according to the specific types of bonds owned (such as high-yield or junk bonds. funds). and micro cap stocks have market capitalizations below $300 million. or primarily foreign securities (international funds). At the end of 2010. blend/core vs. and foreign securities (global or world funds). money market funds accounted for 24% of the assets in all U. and foreign securities (global or world funds).S. Stock funds may invest in primarily U. Only two money market funds have ever broken the buck: Community Banker's U.00 per share because its securities have declined in value. At the end of 2010.e. in both U. it is said to "break the buck". If a fund fails to maintain that $1.S. value). intermediate. 
or equity funds
Stock or equity funds invest in common stocks.S.S. meaning that investors earn interest income from the fund but do not experience capital gains or losses.S.S. The two dimensions are often displayed in a grid known as a "style box. securities (domestic or U.
Bond funds invest in fixed income securities.or long-term).S." Market capitalization or market cap is the value of a company's stock and equals the number of shares outstanding times the market price of the stock. securities (domestic or U.. large cap stocks generally have market capitalizations of at least $10 billion. Bond funds may invest in primarily U. Government Money Market Fund in 1994 and the Reserve Primary Fund in 2008. government bonds or municipal bonds) or by the maturity of the bonds held (short-. Market capitalizations are divided into the following categories:
Micro cap Small cap Mid cap Large cap
While the specific definitions of each category vary with market conditions.S.Money market funds strive to maintain a $1. or primarily foreign securities (international funds). A stock fund may be subclassified along two dimensions: (1) market capitalization and (2) investment style (i. mutual funds. Funds are also classified in these categories based on the market caps of the stocks that it holds. funds). small cap stocks have market capitalizations below $2 billion. investment-grade corporate bonds.00 per share net asset value.S. mutual funds. growth vs. bond funds accounted for 22% of the assets in all U. They may focus on a specific industry or sector. in both U.
(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. Blend funds are not biased toward either growth or value. These fall into four categories: distribution charges (sales loads and 12b-1 fees). other fund expenses.
Investors in mutual funds pay fees. hybrid funds accounted for 6% of the assets in all U. value or blend (or core). shareholder transaction fees and securities transaction fees. Value funds seek to invest in stocks that appear cheaply priced. Hybrid funds may be structured as funds of funds. stock funds accounted for 48% of the assets in all U. Some of these expenses reduce the value of an investor's account. Recurring expenses are included in a fund's expense ratio.
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. such as the S&P 500 index." The front-end load often declines as the amount invested increases. while an actively managed fund seeks to outperform a relevant index through superior security selection. through breakpoints. Front-end loads are deducted from an investor's account and reduce the amount invested. 
Hybrid funds invest in both bonds and stocks or in convertible securities. the management fee. asset allocation funds.S. At the end of 2010.S. Growth funds seek to invest in stocks of fast-growing companies.
Main article: Mutual fund fees and expenses Distribution charges pay for marketing and distribution of the fund's shares to investors. others are paid by the fund and reduce net asset value. Most fund of funds invest in affiliated funds (meaning mutual funds managed by the same fund sponsor). although some invest in unaffiliated funds (meaning those managed by other fund sponsors) or in a combination of the two.Stock funds are also subclassified according to their investment style: growth. Balanced funds. target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid funds. mutual funds. mutual funds. meaning that they invest by buying shares in other mutual funds that invest in securities. At the end of 2010. It is expressed as a percentage of the total amount invested (including the front-end load). known as the "public offering price.
A single mutual fund may give investors a choice of different combinations of front-end loads. or CDSC that declines gradually over several years. The back-end loads may decline the longer the investor holds shares.
. but each has different expenses and. Like front-end loads. subject to a maximum of 1% of assets.
Class B shares don't have a front-end sales load.
Class C shares have a high 12b-1 fee and a modest contingent deferred sales charge that is discontinued after one or two years. The 12b-1 fee is included in the expense ratio. back-end loads are deducted from an investor's account. a different net asset value and different performance results.
A mutual fund may charge an annual fee. Class B shares usually convert automatically to Class A shares after they have been held for a certain period. They are no-load shares. Some of these share classes may be available only to certain types of investors. therefore. back-end loads and 12b-1 fees. does not charge a back-end load under any circumstances and does not charge a 12b-1 fee greater than 0. Instead they.Back-end load
Some funds have a back-end load. Class C shares usually do not convert to another class. have a high contingent deferred sales charge. known as "institutional" shares. for marketing and distribution services. therefore. This fee is computed as a percentage of a fund's assets. Back-end loads with this structure are called contingent deferred sales charges (or CDSCs). Typical share classes for funds sold through brokers or other intermediaries are:
Class A shares usually charge a front-end sales load together with a small 12b-1 fee. which is paid by the investor when shares are redeemed depending on how long they are held. combined with a high 12b-1 fee. by offering several different types of shares.25% of fund assets. All of the shares classes invest in the same portfolio of securities.
Class I are subject to very high minimum investment requirements and are. known as share classes.
A no-load fund does not charge a front-end load under any circumstances. known as a 12b-1 fee. They are often called "level load" shares.
but do charge a small 12b-1 fee.
Shareholders may be required to pay fees for certain transactions.
A mutual fund pays for other services including:
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. which means that it declines as assets (in either the specific fund or in the fund family as a whole) increase. They do not charge loads.
Neither class of shares charges a front-end or back-end load. The management fee often has breakpoints. 60 or 90 days of purchase). a fund may charge a flat fee for maintaining an individual retirement account for an investor.25% of fund assets. Class N shares charge a 12b-1 fee of no more than 0.
Class R are for use in retirement plans such as 401(k) plans. redemption fees are computed as a percentage of the sale amount.
. The fund manager may also provide other administrative services.
The management fee is paid to the fund manager or sponsor who organizes the fund. For example. provides the portfolio management or investment advisory services and normally lends its brand name to the fund. The management fee is paid by the fund and is included in the expense ratio. Some funds charge redemption fees when an investor sells fund shares shortly after buying them (usually defined as within 30. Shareholder transaction fees are not part of the expense ratio.
No-load funds often have two classes of shares:
Class I shares do not charge a 12b-1 fee.
These expenses may include brokerage commissions. Funds must compute their net asset value every day the New York Stock Exchange is open. They do not flow through the income statement and are not included in the expense ratio. The expense ratio equals the 12b-1 fee plus the management fee plus the other fund expenses divided by average net assets. so that it is difficult for investors to reduce the fees that they pay.
Definitions of key terms. The expense ratio is sometimes referred to as the "total expense ratio" or TER. 5-year and 10-year periods using the following formula: P(1+T)n = ERV Where:
. 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.
The expense ratio allows investors to compare expenses across funds. Valuing the securities held in a fund's portfolio is often the most difficult part of calculating net asset value.
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").A mutual fund pays any expenses related to buying or selling the securities in its portfolio. The amount of securities transaction fees paid by a fund is normally positively correlated with its trading volume or "turnover". It is usually expressed as a per-share amount.
Critics of the fund industry argue that fund expenses are too high.
annual total return
The SEC requires that mutual funds report the average annual compounded rates of return for 1-year. They believe that the market for mutual funds is not competitive and that there are many hidden fees. computed by dividing by the number of fund shares outstanding. They suggest that investors look for no-load funds with low expense ratios. The fund's board of directors (or board of trustees) oversees security valuation. Securities transaction fees increase the cost basis of the investments.
. the higher the potential return. This is a safe place to park your money. Although some funds are less risky than others. For example. T = average annual total return. mostly Treasury bills. 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. Let's go over the many different flavors of funds. equity funds that invest only in companies of the same sector or region are known as specialty funds.000 payment made at the beginning of the 1-. Each fund has a predetermined investment objective that tailors the fund's assets. This is a fact for all investments. If the period is less than a year. At the fundamental level.
Mutual Funds: Different Types Of Funds
No matter what type of investor you are. the higher the risk of loss. there are three varieties of mutual funds: 1) Equity funds (stocks) 2) Fixed-income funds (bonds) 3) Money market funds All mutual funds are variations of these three asset classes.000. there is bound to be a mutual fund that fits your style. We'll start with the safest and then work through to the more risky. or 10-year periods (or fractional portion). or 10-year periods at the end of the 1-. regions of investments and investment strategies. In general. ERV = ending redeemable value of a hypothetical $1. while equity funds that invest in fast-growing companies are known as growth funds. n = number of years. 5-. According to the last count there are more than 10. the turnover figure is annualized. 5-. Money Market Funds The money market consists of short-term debt instruments.
Turnover is a measure of the volume of a fund's securities trading.P = a hypothetical initial payment of $1. all funds have some level of risk it's never possible to diversify away all risk. but you won't have to worry about losing your principal. It is expressed as a percentage of net asset value and is normally annualized. It's important to understand that each mutual fund has different risks and rewards.000 mutual funds in North America! That means there are more mutual funds than stocks. You won't get great returns. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit(CD).
The weighting might also be restricted to a specified maximum or minimum for each asset class. the audience for these funds consists of conservative investors and retirees. but bond funds aren't without risk. These terms denote funds that invest primarily in government and corporate debt." "bond. but these kinds of funds typically do not have to hold a specified percentage of any asset class. Furthermore. Balanced Funds The objective of these funds is to provide a balanced mixture of safety. Generally. (Learn more inIncome Funds 101. however. income and capital appreciation. As such. A similar type of fund is known as an asset allocation fund. When referring to mutual funds. the primary objective of these funds is to provide a steady cashflow to investors. nearly all bond funds are subject to interest rate risk. Objectives are similar to those of a balanced fund. A great way to understand the universe of equity funds is to use astyle box. For example. the investment objective of this class of funds is long-term capital growth with some income. There are. Equity Funds Funds that invest in stocks represent the largest category of mutual funds. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. which means that if rates go up the value of the fund goes down. bond funds can vary dramatically depending on where they invest. These companies are characterized by
. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. Because there are many different types of bonds. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. The strategy of balanced funds is to invest in a combination of fixed income and equities. While fund holdings may appreciate in value.) Bond funds are likely to pay higher returns than certificates of deposit and money market investments. an example of which is below. a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities.
The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. many different types of equity funds because there are many different types of equities.Bond/Income Funds Income funds are named appropriately: their purpose is to provide current income on a steady basis." and "income" are synonymous. the terms "fixed-income.
(For further reading. The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. check out Understanding The Mutual Fund Style Box. There is a greater possibility of big gains. they can. technology. health. Sector funds are extremely volatile. which occurs if the region goes into a bad recession. Such a mutual fund would reside in the bottom right quadrant (small and growth). which refers to companies that have had (and are expected to continue to have) strong growth in earnings. you have to accept the high risk of loss.low P/E and price-to-book ratios and high dividend yields. etc. They do tend to be more volatile and have unique country and/or political risks. which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. actually reduce risk by increasing diversification. But. it is likely that another economy somewhere is outperforming the economy of your home country.
. Most socially responsible funds don't invest in industries such as tobacco. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. The opposite of value is growth. Regional funds make it easier to focus on a specific area of the world. as part of a well-balanced portfolio. An advantage of these funds is that they make it easier to buy stock in foreign countries. Although the world's economies are becoming more inter-related.) Global/International Funds An international fund (or foreign fund) invests only outside your home country. only Brazil). The idea is to get a competitive performance while still maintaining a healthy conscience. This may mean focusing on a region (say Latin America) or an individual country (for example. sales and cash flow. alcoholic beverages. weapons or nuclear power. . a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). A compromise between value and growth is blend. which is otherwise difficult and expensive. Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. Specialty Funds This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. For example. It's tough to classify these funds as either riskier or safer than domestic investments. Global funds invest anywhere around the world. on the flip side. Sector funds are targeted at specific sectors of the economy such as financial. Just like for sector funds. including your home country. but you have to accept that your sector may tank.
An investor in an index fund figures that most managers can't beat the market. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA).Index Funds The last but certainly not the least important are index funds.
. An index fund merely replicates the market return and benefits investors in the form of low fees.