Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities. There is no such accurate definition of mutual funds, however the term is most commonly used for collective investment schemes that are regulated and available to the general public and open-ended in nature. Hedge funds are not considered as any type of mutual funds.
Mutual funds are identified by their principal investments. They are the 4th largest category of funds that are also known as money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds are also categorized as index based or actively managed.
In a mutual fund, investors pay the funds expenditure. There is some element of doubt in these expenses. A single mutual fund may give investors a choice of various combinations of these expenses by offering various different types of share combinations.
The fund manager is also known as the fund sponsor or fund management company. The buying and selling of the funds investments in accordance with the funds investment is the objective. A fund manager has to be a registered investment advisor. The same fund manager manages the funds and has the same brand name which is also known as a fund family or fund complex.
As long as mutual comply with requirements that are established in the internal revenue code, they will not be taxed on their income. Clearly, they must expand their investments, limit the ownership of voting securities, disperse most of their income to their investors annually and earn most of their income by investing in securities and currencies.
Mutual funds can pass taxable income to their investors every year. The type of income that they earn remains unchanged as it gets transferred to the shareholders. For e.g., mutual fund distributors of dividend income are described as dividend income by the investor. There is an exception: net losses that are incurred by a mutual fund are not distributed or passed through fund investors.
Mutual funds invest in various kinds of securities. The various types of securities that a particular fund may invest in are mentioned in the funds prospectus, which explain the funds investments objective, its approach and the permitted investments. The objective of the investment describes the kind of income that the fund is looking for. For e.g., a “capital appreciation” fund generally looks to earn most of its returns from the increase in prices of the securities it holds rather than from a dividend or the interest income. The approach of the investment describes the criteria that the fund manager may have used to select the investments for the fund.
The investment portfolio of a mutual funds investment is continuously monitored by the funds portfolio manager or managers who are either employed by the funds manager or the sponsor.
Advantages of Mutual funds are:
- Increase in diversification.
- Liquidity on a daily basis.
- Professional investment management.
- Capacity to participate in investments that may be available only for larger investors.
- Convenience as well as service.
- Government oversight.
- Easier comparison
There are different types of Mutual funds as well. Here are some of them.
In open-end mutual funds, one must be willing to buy back their shares from investors at the end of every business day at the net asset value that is calculated for that day. Most of the open-end funds also sell shares to the public on every business day. These shares are also priced at a particular net asset value. A professional investment manager will oversee the portfolio, while buying or selling securities whichever is appropriate. The total investment in the funds will be variably based on share buying, share redemptions and fluctuation in the market variation. There are also no legal limits on the number of shares that can be issued.
Close-end funds generally issue shares to the public just once, when they are created via an initial public offering. These shares are then listed for trading on a stock exchange. Investors, who dont wish any longer to invest in the funds, cannot sell their shares back to the funds. Instead, they must sell their shares to another investor in the market as the price they may receive may be hugely different from its net asset value. It may be at a premium to net asset value (higher than the net asset value) or more commonly at a lesser to net asset value (lower than the net asset value). A professional investment manager will oversee the portfolio, in buying or selling securities whichever is appropriate.
Unit Investment Trusts
UIT or Unit Investment Trusts issue shares to the public just once when they are created. The investors in turn can cash in on the shares directly with the fund or they may also sell their shares in the market. UITs do not have any professional investment managers. Their portfolio of securities is established by the creation of the UITs and does not undergo any changes. UITs in general have a limited life span, which is limited at their creation.