Mutual fund - Wikipedia, the free encyclopedia http://en.wikipedia.

org/wiki/Mutual_funds

Mutual fund
From Wikipedia, the free encyclopedia.
(Redirected from Mutual funds)

A mutual fund (aka managed fund) enables investors to pool their money and place it under professional investment
management. The portfolio manager trades the fund's underlying securities, realizing a gain or loss, and collects the
dividend or interest income. The investment proceeds are then passed along to the individual investors. There are more
mutual funds than there are individual stocks.

Contents
1 Glossary
1.1 "Open" or "closed"
1.2 Exchange-traded fund
1.3 Net asset value
1.4 Share class
1.5 Turnover
1.6 Load
2 United States
2.1 Scandals
3 United Kingdom
4 See also
5 External links
5.1 Screener
5.2 Glossary
5.3 Associations
5.4 Flows

Glossary
"Open" or "closed"

Most mutual funds are open-end funds. This means that at the end of every day, the investment management company
sponsoring the fund issues new shares to investors and buys back shares from investors wishing to leave the fund. A
mutual fund can also be a closed-end fund. The sponsor of a closed-end fund registers and issues a fixed number of shares
at the initial offering, similar to a common stock. Investors then can buy or sell these shares through a stock exchange.
The sponsor does not redeem or issue shares after a closed-end fund is launched, so the investor must trade them through a
broker.

Exchange-traded fund

Main article: Exchange-traded fund

An innovation, the exchange traded fund (ETF) combines characteristics of both open and closed end mutual funds. An
ETF usually tracks a stock index, like an index fund, but can be redeemed on demand for its underlying holdings,
eliminating the discounts and premiums that are common with closed-end funds and forcing prices to remain very close to
the net asset value (NAV). ETFs are traded throughout the day on a stock exchange, just like closed-end funds.

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Net asset value

Main article: net asset value

The net asset value, or NAV, is a fund's value of its holdings, usually expressed as a per-share amount. For most funds,
the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their
NAV multiple times during the trading day. Open-end funds sell and redeem their shares at the NAV, and so only process
orders after the NAV is determined. Closed-end funds may trade at a higher or lower price than their NAV; this is known
as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have
its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very
small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial
instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the
responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's
assets may be invested in such securities is stated in the fund's prospectus.

Share class

Many mutual funds divide their assets up among multiple classes of shares. All of the assets of each class are effectively
pooled for the purposes of investment management, but classes typically differ in the fees and expenses paid out of the
fund's assets. These differences are supposed to reflect different costs involved in servicing investors in various classes;
for example, one class may be sold through brokers with a front-end load, and another class may be sold direct to the
public with no load but a "12b-1 fee" included in the class's expenses. Still a third class might have a minimum investment
of $10,000,000 and only be open to financial institutions (a so-called "institutional" class). In some cases, by aggregating
regular investments by many individuals, a retirement plan (such as a 401(k) plan) may qualify to purchase "institutional"
shares (and gain the benefit of their typically-lower expense ratios) even though no members of the plan would qualify
individually.

Turnover

Turnover is a measure of the amount of securities that are bought and sold, usually in a year, and usually expressed as a
percentage of net asset value. It shows how actively managed the fund is.

A caveat is that this value is sometimes calculated as the value of all transactions (buying, selling) divided by 2; i.e., the
fund counts one security sold and another one bought as one "transaction". This makes the turnover look half as high as
would be according to the standard measure.

Turnover generally has tax consequences for a fund, which are passed through to investors. In particular, when selling an
investment from its portfolio, a fund may realize a capital gain, which will ultimately be distributed to investors as taxable
income. The very process of buying and selling securities also has its own costs, such as brokerage commissions, which
are borne by the fund's shareholders.

The Dalbar Inc. consultancy studied mutual fund stock returns over the period from 1984 to 2000. Dalbar found that the
average stock fund returned 14 percent; during that same period, the typical mutual fund investor had a 5.3 percent return
([1] (http://www.hussmanfunds.com/rsi/aimr1fim.htm) ). This finding has made both "personal turnover" (buying and
selling mutual funds) and "professional turnover" (buying mutual funds with a turnover above perhaps 5%) unattractive to
some people.

Load

A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares are purchased, taken as a
percentage of funds invested. The value of the investment is reduced by the amount of the load. Some funds have a
deferred sales charge or back-end load which is paid to the broker out of the proceeds when shares are redeemed. (This is

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distinct from a redemption fee, which is also paid out of proceeds, but is kept by the fund. Many funds charge redemption
fees when shares are sold a short time after they are purchased, to discourage investors from market timing.) Load funds
are sold through financial intermediaries such as brokers, financial planners, and other types of registered representatives
who charge a commission for their services.

It is possible to buy many mutual funds directly from the fund sponsor, without paying a sales charge. These are called
no-load funds. Some discount brokers will sell no-load funds, sometimes for a flat transaction fee or even no fee at all.
(This does not necessarily mean that the broker is not compensated for the transaction; in such cases, the fund may pay
brokers' commissions out of "distribution and marketing" expenses rather than a specific sales charge.)

United States
Mutual funds can invest in many different kinds of securities. The most common are cash, stock, and bonds, but there are
hundreds of sub-categories. Stock funds, for instance, can invest primarily in the shares of a particular industry, such as
high technology or utilities. These are known as sector funds. Bond funds can vary according to risk (high yield or junk
bonds, investment-grade corporate bonds), type of issuers (government agencies, corporations, or municipalities), or
maturity of the bonds (short or long term). Both stock and bond funds can invest in primarily US securities (domestic
funds), both US and foreign securities (global funds), or primarily foreign securities (international funds). By law, mutual
funds cannot invest in commodities and their derivatives or in real estate. (However, there do exist real estate investment
trusts, or REITs, which invest solely in real estate or mortgages, and mutual funds are allowed to hold shares in REITs.) A
mutual fund may restrict itself in other ways. These restrictions, permissions, and policies are found in the prospectus,
which every open-end mutual fund must make available to a potential investor before accepting his or her money.

Most mutual funds' investment portfolios are continually adjusted under the supervision of a professional manager, who
forecasts the future performance of investments appropriate for the fund and chooses the ones which he or she believes
will most closely match the fund's stated investment objective. This is called active management, in contrast to indexing,
in which a fund's assets are managed to closely approximate the performance of a particular published index. Because the
composition of an index changes less frequently than the condition of the market, an index fund manager makes fewer
trades, on average, than does an active fund manager. For this reason, index funds generally have lower expenses than
actively-managed funds, and typically incur fewer capital gains which must be passed on to shareholders. The majority of
actively managed funds usually only match the performance of the index fund, but since they have higher costs they then
underperform the index funds. Three fourths of all mutual funds underperform the S&P 500 index. This means the
majority of the professional managers can't execute a better stock picking strategy than simply buying the 500 S&P
companies equally. For this reason, many advisors strongly suggest avoiding mutual funds.

Mutual funds are corporations under US law, but they are subject to a special set of regulatory, accounting, and tax rules.
Unlike most other types of corporations, they are not taxed on their income as long as they distribute substantially all of it
to their shareholders. Also, the type of income they earn is often unchanged as it passes through to the shareholders.
Mutual fund distributions of tax-free municipal bond income are also tax-free to the shareholder. Taxable distributions can
either be ordinary income or capital gains, depending on how the fund earned it.

Picking a mutual fund from among the thousands offered is not easy. The following is just a rough guide, with some
common pitfalls.

1. Unless you are in the highest tax bracket, you probably don't need a tax-exempt fund.
2. Match the term of the investment to the time you expect to keep it invested. Money you may need right away (for
example, if your car breaks down) should be in a money market account. Money you will not need until you retire
in 30 years (or for a newborn's college education) should be in longer-term investments, such as stock or bond
funds. Putting money you will need soon in stocks risks having to sell them when the market is low and missing
out on the rebound.
3. There are some funds that invest in both stocks and bonds called "balanced funds." These are not generally as good
an idea as a do-it-yourself balance of a stock fund and a bond fund, simply because you get to control the mix
yourself. More stock is more aggressive, more bond is more conservative.
4. Expenses matter over the long term, and of course, cheaper is usually better. You can find the expense ratio in the
prospectus. Expense ratios are critical in index funds, which seek to match the market. Actively managed funds

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need to pay the manager, so they usually have a higher expense ratio.
5. Sector funds often make the "best fund" lists you see every year. The problem is that it is usually a different sector
each year (internet funds, anyone?). Also some secters are vulnerable to industry-wide events (airlines do come to
mind). Avoid making these a large part of your portfolio.
6. Closed-end bond funds often sell at a discount to the value of their holdings. You can sometimes get extra income
by buying these in the market. Hedge fund managers love this trick. This also implies that buying them at the
original issue is usually a bad idea, since the price will often drop immediately.
7. Mutual funds often make their distributions near the end of the year. If you get the money, you will have to pay
taxes on it. Check the fund company's website to see when they plan to pay the dividend, and wait until afterwards
if it is coming up soon.
8. Do your homework. Read the prospectus, or as much of it as you can stand. It should tell you what these strangers
can do with your money, among other vital topics. Check the performance of a fund against its peers with similar
investment objectives, and against the index most closely associated with it. Be sure to pay attention to
performance over both the long-term and the short-term. A fund that gained 53% over a 1-yr. period (which is
impressive), but only 11% over a 5-yr. period should raise some suspicion, as that would imply that the returns on
four out of those five years were actually very low (if not straight losses) as 11% compounded over 5 years is only
68%.
9. Diversification is the best way to reduce risk. Most people should own some stocks, some bonds, and some cash.
Some of the stocks, at least, should be foreign. You might not get as much diversification as you think if all your
stock funds are with the same management company, since there is often a common source of research and
recommendations. Too many funds, on the other hand, will give you about the same effect as an index fund, except
your expenses will be higher. Buying individual stocks exposes you to company-specific risks, and if you buy a
large number of stocks the commissions may cost more than a fund will.
10. The compounding effect is your best friend. A little money invested for a long time equals a lot of money later.

Scandals

In September 2003, the US mutual fund industry was beset by a scandal in which major fund companies permitted and
facilitated "late trading" and "market timing".

United Kingdom
In the United Kingdom the term "mutual fund" may be confusing due to the existence of building societies and mutual life
companies which in law are owned by their members and which have no share holders to distribute profits to and
consequently are referred to as "mutuals". Collectively managed funds are referred to by type, and the following are the
principal ones are available:

investment trusts which are themselves quoted companies, often with a fixed life. The quoted price of the
company may trade at a discount (lower) or premium (higher) than the value of the investments it holds at any
point in time, giving rise to more volatility and risk as well as opportunities. Investment trusts may also be split into
different types of shares to appeal to different types of investor. These are known as split capital trusts.
Unit Trusts are traditional arrangements set up as a trust rather than a company and are open ended. The fund is
divided into units rather than shares that build in trading and management costs through the canceling of units meet
management charges and by way of a dual pricing policy of units to meet trading costs. Units have a bid (buying)
and offer (selling) price at a given time and the difference is known as the bid-offer spread.
OEICs (pronounced "OIKS") is an acronym for "Open Ended Investment Companies" which are rapidly displacing
Unit Trusts which operate under, what is considered to be, archaic rules. Additionally OEICs are easily marketed
overseas and are seen as a way of developing the collectively managed fund market. A major difference is that
OEICs have shares (but unlike Investment Trusts they reflect asset value like the units in a unit trust) and these are
traded with a single price (any initial charges are levied explicitly by reducing capital).
ICVCs' (Investment Companies with Variable Capital) an alternative name for OEICs.

Tax favoured products such as Pensions or Individual Savings Accounts may include any of the above, although separate
Pension funds and (subject to involved differences) Life Insurance funds exist with their own legislative control and tax
treatment.

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See also
closed-end fund
index fund
list of mutual-fund families
mutual fund scandal (2003)
open-end fund
unit trust

External links
Adviser Online (http://www.adviseronline.com/) is the best-known and most widely-read independent expert
focused solely on the Vanguard Group of mutual funds. Investors interested in Vanguard have relied on this
independent resource for more than a decade since its 1991 founding.
Morningstar (http://www.morningstar.com/) uses a star system for its ratings, similar to a restaurant review. This
site also lets you search, filter, and screen many mutual funds.
About Mutual Funds (http://mutualfunds.about.com) is a site with over 800 pages dedicated towards mutual fund
education. Those new to mutual funds should consider taking the free course Mutual Funds 101
(http://mutualfunds.about.com/c/ec/1.htm) .
Advantages and Disadvantages of Mutual Funds
(http://chinese-school.netfirms.com/abacus-mutual-funds-advantages.html) - A list of advantages and
disadvantages of mutual funds.
Fidelity Investor (http://fidelityinvestor.com/) takes an independent view of the world's largest mutual fund family.
Editor Jim Lowell tracks Fidelity and suggests portfolios that have outperformed their benchmarks since inception.
He has been called the world's leading expert on investing in Fidelity funds.
Mutual Fund Directory and Resource (http://directory.google.com/Top/Business/Investing/Mutual_Funds/)
GuruFocus.com (http://www.gurufocus.com/) - Stock picks and market insight of the best mutual fund managers.
Fund Industry Discussion Forum (Fundindustry) (http://www.fundindustry.info/) - For mutual fund and ETF
investors considering governance, costs and fees in a post-Spitzer world.
GreekShares.com - Types of Mutual Funds (http://www.greekshares.com/mutualtype.asp)

Screener

Yahoo! (http://screen.yahoo.com/funds.html) has a very good fund screener which also uses the Morningstar rating
system. It also lets you see the minimum investment amount quickly.

Glossary

Mutual Fund (http://mutualfunds.about.com/cs/glossaries/g/mutual_fund.htm)

No-Load Fund (http://www.investopedia.com/terms/n/no-loadfund.asp)
Load Fund (http://mutualfunds.about.com/cs/glossaries/g/loaddef.htm)

Associations

The Investment Company Institute (http://www.ici.org/) is the fund industry group. It has some excellent investor
education materials on line.

Flows

AMG Data Services - AMG Data Services (http://www.amgdata.com/)

TrimTabs Investment Research (http://www.trimtabs.com/)

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