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MUTUAL FUNDS:

Introduction:
Mutual funds have been around for long time, dating back to the early 19th century. The first modern American mutual fund opened in 1924, yet it was only in the 1990s that mutual funds became main stream investments, as the number of households owning them nearly tripled during that decade. With recent surveys showing that over 88% of all investors participates in mutual funds. A mutual fund is a special type of economy that pools together money from many investors and invests it on behalf of the group, in accordance with a stated set for objectives. It raise the money by selling shares of the fund to the public, much like any other company can sell stock in itself to the public. Funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shares holders receive an equity position in the fund and, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund.

Definition:
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual Funds are operated by money managers, who invest the capital and attempt to produce capital gains and incomes for the funds investors. A mutual funds portfolio is structured a maintained to match the investment objectives stated in its prospectus.

What is Mutual Funds:


A mutual fund is a professionally managed investment company that combines the money of many individuals and invests this pooled money in a wide variety of different securities. It is by pooling the money of many individuals that mutual are able to provide the diversification and money management (along with many other advantages) that were once reserved only for the wealthy. Professional money managers take this pool of money and invest it in wide variety of stocks, bonds, or other securities depending on the investment objective, or goal, of the particular fund. It investment objective of the fund that guides the manager in selecting the various securities for the fund.

It can be classified according to their investment objective. Some of the classifications include money market funds, growth funds, balanced funds, income funds and many others.

How to Profit with Mutual Funds:


When you invest in a mutual fund you hope that the value will rise and you can eventually sell your shares for a profit. This is one of the ways you can profit with mutual funds. Another way is through capital gains. When a mutual fund sells a security for a higher price than it originally paid for it, it is known as a capital gain. Most mutual funds distribute their capital gains to shareholders at least annually, some more often. The last way to profit with mutual funds is with dividends or interest. If the fund has invested in bonds or dividend-paying stocks, it must pass the dividends or interest earned on to its shareholders. Like capital gains, this is done at least annually.

Net Asset Value:


When you invest money in mutual fund, you buy shares in that fund. To determine the price of those shares, each day the fund adds the total value of the securities held in p portfolio. This total is divided by the number of share outstanding. The resulting figure is known as the Net Asset Value or NAV. To find out the value of your holdings, you simply multiply the number of shares you own by the Net Asset Value. The Net Value Asset of most of funds is listed in most daily news papers. The Net Value Asset will change daily depending on how well the underlying securities of the fund perform. If the securities held by the fund go up in value so will the value of your shares.

Open End & Closed End Mutual Funds:


As stated above, mutual funds are generally classified according to investment objective of the fund. They are also classified according to how they are bought and sold. There are open or closed end funds. An open-end fund is a mutual fund that continuously issues new shares as needed and buys them back when the investor wish to sell. There is no limit to how many shares an open-end fund can sell. The buy and sell price is based on the Net Asset Value of the fund. The majority of mutual funds on the market today are open-end funds.

A closed-end mutual fund more closely resembles that of individual stock. A closed end fund is a mutual fund that issues a fixed number of shares which are then traded (bought and sold) on a stock exchange or over the counter. Although the underlying value of the securities in a closedend fund may be, for example, $ 10.00 per share, they may sell for more or less depending on investors outlook for the future value of the securities.

Categories:
Aggressive Growth Funds: Seek maximum capital gains as their investment objective. Current income is not significant factor. Some may invest in stocks of business that are somewhat out of the stream, such as fledging companies, new industries, companies fallen on hard lines, or industries temporarily out of favor. Some may also use specialized techniques such as option writing or short-term trading. Balanced Funds: Generally have three-part investment objectives. 1) to conserve the investors initial principal, 2) to pay current income, and 3) to promote long-term growth of both principal and income. Balanced funds have a portfolio mix of bonds, preferred stocks, and common stocks. Corporate Bond Funds: Like income funds, seek a high level of income. They do so buying bonds of corporations for the majority of the funds portfolio. The reset of the portfolio may be U.S. Treasury bonds or bonds issued by a federal agency. Flexible Portfolio Funds: May be 100% invested in stocks or bonds money market instruments, depending on market conditions. These funds give the money managers the greatest flexibility in anticipating or responding to economic changes. GNMA or Ginnie Mae Funds: Invest in mortgage securities backed by the Government National Mortgage Association (GNMA). To qualify for this category, the majority of the portfolio must always be invested in mortgage- backed securities.

Global Bond Funds: Invest in the debt securities of companies and countries worldwide, including the United States.

Global Equity Funds: Invest in securities traded worldwide, including the United States. Growth And Income Funds: Invest mainly in the common stock of companies that have had increasing share value but also a solid record of paying dividends. This type of fund attempts to combine long term capital growth with a steady stream of income. High Yield Bond Funds: Maintain at least two-thirds of their portfolios in lower rated corporate bonds (Baa or lower by Moodys rating service and BBB or lower by Standard & Poors rating service). In return for generally high yield, investors must bear a greater degree of risk than for higher rated bonds. Income - Bond Funds: Seek a high level of current income for their shareholders by investing at all times in a mix of corporate and government bonds. Income Equity Funds: Seek a high level of current income for their shareholders by investing primarily in equity securities of companies with good dividend paying records. Income Mixed Funds: Seek a high level of current income for their shareholders by investing in income producing securities, including both equities and debt instruments. International Funds:

Invest in equity securities of companies located outside the U.S two thirds of their portfolios must be so invested at all times to be categorized here. Long Term Municipal Bond Funds: Invest in bonds issued by states and municipalities to finance schools, highways, hospitals, airports, bridges, water and sewer works, and other public projects. In most cases, income earned on these securities is not taxed by the federal government, but may be taxed under state and local laws. Precious Metals/Gold Funds: Maintain two thirds of their portfolios invested in securities associates with gold, sliver and other precious metals. Taxable Money Market Funds: Seek to maintain a stable Net Asset Value by investing in the short term, high grade securities sold in money market, such as treasury bills, bank certificates of deposit and commercial paper ( the short term IOUs of large U.S corporations). Money Market funds limit the average maturity of their portfolio to 90 days or less. Tax Exempt Money Market Funds- National:

Invest in municipal securities with relatively short maturities. Investors who use these funds seek investments with minimum risks. For some taxpayers, portions of income from certain of these securities may be subject to the federal alternative minimum tax. U.S Government Income Funds: Invest in a variety of government securities. These include U.S. Treasury bonds, federally, guaranteed mortgage-backed securities, and other government notes.

Advantage of Mutual Fund:


Advanced Portfolio management:

You pay a management fees as part of your expense ratio, which is used to hire a professional portfolio manager who buys and sells stocks, bonds, etc. This is a relatively small price to pay for help in the management of an investment portfolio.

Dividend Reinvestment: As dividend and other interest income is declared for the fund, it can be used to purchase additional shares in the mutual fund, thus helping your investment grow.

Risk Reduction (Safety): As reduced portfolio risk is achieved through the use of diversification, as most mutual funds will invest in anywhere from 50 to 200 different securities- depending on their focus. Several index stock mutual funds own 1,000 or more individual stock positions.

Convenience and Fair Pricing: Mutual Funds are common and easy to buy. They typically have low minimum investments (some around $2,500) and they are traded only once per day at closing Net Asset Value. This eliminates price fluctuation throughout the day and various arbitrage opportunities that day traders practice.

Disadvantage of Mutual Funds:


High Expenses Ratio and Sales Charge: If youre not paying attention to mutual fund expense ratios and sales charges, they can get out of hand. Be very cautious when investing in funds with expense ratios higher than 1.20%, as they consider on the high cost end. Be weary of 12b-1 advertising fees and sales charge in general.

Management Abuses: Churning, turnover and window dressing may happen if you manager is abusing his or her authority. This includes necessary trading, excessive replacement and selling the losers prior to quarter-end to fix the books.

Tax Inefficiency: Like it or not, investors do not have a choice when it comes to capital gain payouts in mutual funds. Due to the turnover, redemptions, gains, and losses in security holding throughout the year, investors typically receive distributions from the fund that are an uncontrollable tax event.

Poor Trade Execution: If you place your mutual fund trade any time before the cut-off time for same-day NAV, youll receive the same closing price NAV for your buy or sell on mutual fund. For investors looking for faster execution times, may be because of short investment horizons, day trading, or timing the market, mutual funds provide a weak execution strategy.

Conclusion:
Mutual Fund managers to follow analyst recommendation revisions when they trade stocks, and impact of these analyst revision- motivated mutual fund herds on stocks prices. We find evidence that mutual fund herding impacts stock prices to much importantly; we find that mutual funds herds from most prominently following a consensus revision in analysiss recommendations. Positive consensus recommendation revisions result, most frequently, in a herd of funds buying a stock, while negative revisions result, most frequently, in a herd of fund selling. In addition, mutual funds react more strongly to analyst information when it appears to be more credible. Finally, we find that the selling of funds with greater career concerns plays a greater role in destabilizing stock prices, supporting the conjecture that analyst revision induced herding is driven partly by non- information related incentives. Further investigation into other incentives that drive herding that drive herding on analyst revisions is left to future research.

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