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Encyclopedia > Mutual fund
Financial market
participants

Investors
There are two basic financial market participant catagories, Investor vs. ... Image File history File linksMetadata Size of this preview: 800 × 600 pixelsFull resolution (2816 × 2112 pixel, file size: 2. ... An investor is any party that makes an investment. ...

Speculators
speculation
Speculation is the buying, holding, and selling of stocks, commodities, futures, currencies, collectibles, real estate, or any valuable thing to profit from fluctuations in its price as opposed to buying it for use or for income - dividends, rent etc. ... Speculation involves the buying, holding, and selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. ...

Institutional investors
Insurance companies
Investment banks
Hedge funds
Mutual funds
Pension funds
Private equity funds
Venture capital funds
Banks
Credit Unions
Trusts
Prime Brokers
An institutional investor is an investor who is an institution like a bank, insurance fund, retirement fund, or mutual fund manager. ... Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. ... Investment banks help companies and governments (or their agencies) raise money by issuing and selling securities in the capital markets (both equity and debt). ... A hedge fund is a private investment fund charging a performance fee and typically open to only a limited range of qualified investors. ... A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. ... A private equity fund is a collaboration of funds that directs a private companys or individuals equity, either in the stock market or in real estate. ... Venture capital is a general term to describe financing for startup and early stage businesses as well as businesses in turn around situations. ... For other uses, see Bank (disambiguation). ... A credit union is a cooperative financial institution that is owned and controlled by its members. ... A trust company is normally owned by one of three types of structures; an independent partnership, a bank, or a law firm, each of which specialize in being a trustee of various kinds of trusts, and managing estates. ... Prime Brokerage is a service sold by investment banks to hedge funds. ...


Finance series
Financial market
Participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... Financial supervision is government supervision of financial institutions by regulators. ...

 v  d  e 
This article deals with U.S. mutual funds. For other forms of mutual investment, see Collective investment schemes.

A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.[1] In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. Funds financial information A collective investment scheme is a way of investing money with a large number of people to participate in a wider range of investments that may not be feasible for an individual investor hence many investors share the costs of doing so. ... Funds financial information A collective investment scheme is a way of investing money with a large number of people to participate in a wider range of investments that may not be feasible for an individual investor hence many investors share the costs of doing so. ... For other uses, see Stock (disambiguation). ... For alternative meanings, see bond (a disambiguation page). ... This article is about short-term financing. ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable instrument representing financial value. ... Investment management, also called asset management, fund management or portfolio management is the professional management of collective investments (including insurance and pension funds) to meet specified investment goals for the benefit of the investors. ... In finance, a capital gain is profit that results from the appreciation of a capital asset over its purchase price. ... It has been suggested that ex-dividend date be merged into this article or section. ... For other senses of this word, see interest (disambiguation). ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ... The Net Asset Value or NAV is a term used to describe the value of an entitys assets less the value of its liabilities. ...


Legally known as an "open-end company" under the Investment Company Act of 1940 (the primary regulatory statute governing investment companies), a mutual fund is one of three basic types of investment companies available in the United States.[2] Outside of the United States (with the exception of Canada, which follows the U.S. model), mutual fund may be used as a generic term for various types of collective investment vehicle. In the United Kingdom and western Europe (including offshore jurisdictions), other forms of collective investment vehicle are prevalent, including unit trusts, open-ended investment comhgjghghghjghghjhjhhjhgjhjjhjhjhjpanies (OEICs), SICAVs and unitized insurance funds. In Australia and New Zealand the term "mutual fund" is generally not used; the name "managed fund" is used instead. The Investment Company Act of 1940 is an Act of Congress. ... An investment company is a company whose main business is holding securities of other companies purely for investment purposes. ... For other uses, see Europe (disambiguation). ... An offshore financial centre (or OFC), although not precisely defined, is usually a low-tax, lightly regulated jurisdiction which specialises in providing the corporate and commercial infrastructure to facilitate the use of that jurisdiction for the formation of offshore companies and for the investment of offshore funds. ... A unit trust is a form of collective investment constituted under a trust deed. ... An ICVC or Investment Company with Variable Capital is a type of open ended collective investment formed as a corporation under the Open-Ended Investment Companies Regulations. ... A SICAV is an open-ended collective investment scheme common in Western Europe especially Luxembourg, Switzerland, Italy and France. ... Unitised insurance funds are a form of collective investment offered through life assurance policies. ...

Contents

History

Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924. MFS Investment Management, formerly Massachusetts Financial Services, is a Boston, Massachusetts-based financial services firm. ... is the 80th day of the year (81st in leap years) in the Gregorian calendar. ... For the rap album, see 1924 (album). ... A shareholder or stockholder is an individual or company (including a corporation), that legally owns one or more shares of stock in a joint stock company. ... A closed-end fund is a collective investment scheme with a limited number of shares. ...


The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the Securities and Exchange Commission (SEC) and provide prospective investors with a prospectus that contains required disclosures about the fund, the securities themselves, and fund manager. The SEC helped draft the Investment Company Act of 1940, which sets forth the guidelines with which all SEC-registered funds today must comply. Crowd gathering on Wall Street. ... Congress in Joint Session. ... Image:Thumbtack. ... The Securities Exchange Act of 1934 was a sweeping piece of legislation in the United States regulating the participants in the financial markets. ... SEC redirects here. ... A prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. ... The Investment Company Act of 1940 is an Act of Congress. ...


With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s, there were approximately 270 funds with $48 billion in assets. The first retail index fund, the First Index Investment Trust, was formed in 1976 and headed by John Bogle, who conceptualized many of the key tenets of the industry in his 1951 senior thesis at Princeton University[3]. It is now called the Vanguard 500 Index Fund and is one of the largest mutual funds ever with over $100 billion in assets. John C. (Jack) Bogle (b. ... Princeton University is a private coeducational research university located in Princeton, New Jersey. ... The Vanguard Group is an American investment management company that offers mutual funds and other financial products and services to individual investors and institutional investors in the United States and abroad. ...


One of the largest contributors of mutual fund growth was individual retirement account (IRA) provisions added to the Internal Revenue Code in 1975, allowing individuals (including those already in corporate pension plans) to contribute $2,000 a year. Mutual funds are now popular in employer-sponsored defined contribution retirement plans (401(k)s), IRAs and Roth IRAs. Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... The 401(k) plan is a type of retirement plan available in the United States. ... A Roth IRA is an individual retirement account (IRA) allowed under the tax law of the United States. ...


As of April 2006, there are 8,606 mutual funds that belong to the Investment Company Institute (ICI), the national association of investment companies in the United States, with combined assets of $9.207 trillion.[4] The Investment Company Institute (ICI) is an American investment company trade organization. ...


Usage

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 technology or utilities. These are known as sector funds. Bond funds can vary according to risk (e.g., high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g., government agencies, corporations, or municipalities), or maturity of the bonds (short- or long-term). Both stock and bond funds can invest in primarily U.S. securities (domestic funds), both U.S. and foreign securities (global funds), or primarily foreign securities (international funds). For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable instrument representing financial value. ... For other uses, see Cash (disambiguation). ... For other uses, see Stock (disambiguation). ... For alternative meanings, see bond (a disambiguation page). ... By the mid 20th century humans had achieved a mastery of technology sufficient to leave the surface of the Earth for the first time and explore space. ... High yield debt (non-investment grade or junk bond) is a business term referring to a corporate debt instrument, usually a bond, that has a higher yield (compared to investment grade debt) because of a high perceived credit risk (default risk). ...


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 those which he or she believes will most closely match the fund's stated investment objective. A mutual fund is administered through a parent management company, which may hire or fire fund managers. In finance, a portfolio is a collection of investments held by an institution or a private individual. ...


Mutual funds are liable to a special set of regulatory, accounting, and tax rules. Unlike most other types of business entities, 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 be either ordinary income or capital gains, depending on how the fund earned those distributions. It has been suggested that Accounting scholarship be merged into this article or section. ... Under the United States Internal Revenue Code, the type of income is defined by its character. ... In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ...


Net asset value

Main article: Net asset value

The net asset value, or NAV, is the current market value of a fund's holdings, less the fund's liabilities, 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. The public offering price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares of which are traded by investors) 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. The Net Asset Value or NAV is a term used to describe the value of an entitys assets less the value of its liabilities. ...


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. Derivatives traders at the Chicago Board of Trade. ...


Turnover

Turnover is a measure of the fund's securities transactions, usually calculated over a year's time, and usually expressed as a percentage of net asset value. Look up Turnover in Wiktionary, the free dictionary. ...


This value is usually calculated as the value of all transactions (buying, selling) divided by 2 divided by the fund's total holdings; i.e., the fund counts one security sold and another one bought as one "turnover". Thus turnover measures the replacement of holdings.


In Canada, under NI 81-106 (required disclosure for investment funds) turnover ratio is calculated based on the lesser of purchases or sales divided by the average size of the portfolio (including cash).


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 process of buying and selling securities also has its own costs, such as brokerage commissions, which are borne by the fund's shareholders. In finance, a capital gain is profit that results from the appreciation of a capital asset over its purchase price. ...


Expenses and TER'S

Mutual funds bear expenses similar to other companies. The fee structure of a mutual fund can be divided into two or three main components: management fee, nonmanagement expense, and 12b-1/non-12b-1 fees. All expenses are expressed as a percentage of the average daily net assets of the fund.


Management Fees

The management fee for the fund is usually synonymous with the contractual investment advisory fee charged for the management of a fund's investments. However, as many fund companies include administrative fees in the advisory fee component, when attempting to compare the total management expenses of different funds, it is helpful to define management fee as equal to the contractual advisory fee + the contractual administrator fee. This "levels the playing field" when comparing management fee components across multiple funds.


Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single fee charged to the fund, regardless of the asset size of the fund. However, many funds have contractual fees which include breakpoints, so that as the value of a fund's assets increases, the advisory fee paid decreases. Another way in which the advisory fees remain competitive is by structuring the fee so that it is based on the value of all of the assets of a group or a complex of funds rather than those of a single fund.


Non-management Expenses

Apart from the management fee, there are certain non-management expenses which most funds must pay. Some of the more significant (in terms of amount) non-management expenses are: transfer agent expenses (this is usually the person you get on the other end of the phone line when you want to purchase/sell shares of a fund), custodian expense (the fund's assets are kept in custody by a bank which charges a custody fee), legal/audit expense, fund accounting expense, registration expense (the SEC charges a registration fee when funds file registration statements with it), board of directors/trustees expense (the disinterested members of the board who oversee the fund are usually paid a fee for their time spent at board meetings), and printing and postage expense (incurred when printing and delivering shareholder reports).


12b-1/Non-12b-1 Service Fees

12b-1 service fees/shareholder servicing fees are contractual fees which a fund may charge to cover the marketing expenses of the fund. Non-12b-1 service fees are marketing/shareholder servicing fees which do not fall under SEC rule 12b-1. While funds do not have to charge the full contractual 12b-1 fee, they often do. When investing in a front-end load or no-load fund, the 12b-1 fees for the fund are usually .250% (or 25 basis points). The 12b-1 fees for back-end and level-load share classes are usually between 50 and 75 basis points but may be as much as 100 basis points. While funds are often marketed as "no-load" funds, this does not mean they do not charge a distribution expense through a different mechanism. It is expected that a fund listed on an online brokerage site will be paying for the "shelf-space" in a different manner even if not directly through a 12b-1 fee.


Fees and Expenses Borne by the Investor (not the Fund)

Fees and expenses borne by the investor vary based on the arrangement made with the investor's broker. Sales loads (or contingent deferred sales loads (CDSL)) are not included in the fund's total expense ratio (TER) because they do not pass through the statement of operations for the fund. Additionally, funds may charge early redemption fees to discourage investors from swapping money into and out of the fund quickly, which may force the fund to make bad trades to obtain the necessary liquidity. For example, Fidelity Diversified International Fund (FDIVX) charges a 1 percent fee on money removed from the fund in less than 30 days. Fidelity Investments is a group of privately held companies in the financial services industry. ...


Brokerage Commissions

An additional expense which does not pass through the statement of operations and cannot be controlled by the investor is brokerage commissions. Brokerage commissions are incorporated into the price of the fund and are reported usually 3 months after the fund's annual report in the statement of additional information. Brokerage commissions are directly related to portfolio turnover (portfolio turnover refers to the number of times the fund's assets are bought and sold over the course of a year). Usually the higher the rate of the portfolio turnover, the higher the brokerage commissions. The advisors of mutual fund companies are required to achieve "best execution" through brokerage arrangements so that the commissions charged to the fund will not be excessive. The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. ...


Types of mutual funds

Open-end fund

The term mutual fund is the common name for an open-end investment company. Being open-ended means that, at the end of every day, the fund issues new shares to investors and buys back shares from investors wishing to leave the fund. An open-end(ed) fund is a collective investment which can issue and redeem shares at any time. ... In financial markets, a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REITs. ...


Mutual funds may be legally structured as corporations or business trusts but in either instance are classed as open-end investment companies by the SEC. For other uses, see Corporation (disambiguation). ... A Massachusetts business trust or MBT is a legal trust set up for the purposes of business in the state of Massachusetts. ...


Other funds have a limited number of shares; these are either closed-end funds or unit investment trusts, neither of which is a mutual fund. A closed-end fund is a collective investment scheme with a limited number of shares. ... Note: the Unit Trust (UT) is a separate mainly UK fund type. ...


Exchange-traded funds

Main article: Exchange-traded fund

A relatively recent innovation, the exchange traded fund (ETF), is often formulated as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-end funds. An ETF usually tracks a stock index (see Index funds). Shares are issued or redeemed by institutional investors in large blocks (typically of 50,000). Investors typically purchase shares in small quantities through brokers at a small premium or discount to the net asset value; this is how the institutional investor makes its profit. Because the institutional investors handle the majority of trades, ETFs are more efficient than traditional mutual funds (which are continuously issuing new securities and redeeming old ones, keeping detailed records of such issuance and redemption transactions, and, to effect such transactions, continually buying and selling securities and maintaining liquidity position) and therefore tend to have lower expenses. ETFs are traded throughout the day on a stock exchange, just like closed-end funds. Exchange-traded funds (or ETFs) are open-ended investment companies that can be traded at any time throughout the course of the day. ... This article deals with U.S. mutual funds. ...


Exchange traded funds are also valuable for foreign investors who are often able to buy and sell securities traded on a stock market, but who, for regulatory reasons, are unable to participate in traditional US mutual funds.


Equity funds

Equity funds, which consist mainly of stock investments, are the most common type of mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the United States. [5] Often equity funds focus investments on particular strategies and certain types of issuers.


Capitalization

Fund managers and other investment professionals have varying definitions of mid-cap, and large-cap ranges. The following ranges are used by Russell Indexes: [6] Mid-cap refers to stocks that have a middle market capitalization. ... Large-cap refers to stocks that have a large market capitalization. ... The Russell Indexes (note that Russell uses Indexes rather than Indices) are a set of stock market indices of listed U.S. companies. ...

  • Russell Microcap Index - micro-cap ($54.8 - 539.5 million)
  • Russell 2000 Index - small-cap ($182.6 million - 1.8 billion)
  • Russell Midcap Index - mid-cap ($1.8 - 13.7 billion)
  • Russell 1000 Index - large-cap ($1.8 - 386.9 billion)

The Russell 2000 Index is a stock market index consisting of 2000 small cap US stocks. ... The Russell Midcap Index is a stock index of US stocks. ... The Russell Indexes (note that Russell uses Indexes rather than Indices) are a set of stock indexes of listed US companies. ...

Growth vs. value

Another distinction is made between growth funds, which invest in stocks of companies that have the potential for large capital gains, and value funds, which concentrate on stocks that are undervalued. Value stocks have historically produced higher returns; however, financial theory states this is compensation for their greater risk. Growth funds tend not to pay regular dividends. Income funds tend to be more conservative investments, with a focus on stocks that pay dividends. A balanced fund may use a combination of strategies, typically including some level of investment in bonds, to stay more conservative when it comes to risk, yet aim for some growth.[citation needed] Growth Stocks in finance, are stocks that appreciate in value and yield a high return on equity (ROE). ... In finance, a capital gain is profit that results from the appreciation of a capital asset over its purchase price. ... In financial terminology, a stock that appears attractive using the fundamental criteria of stock valuation because of valuable assets, particularly cash and real estate, owned by its company. ... It has been suggested that ex-dividend date be merged into this article or section. ... A mutual fund whose goal is to provide an income from investments. ... For alternative meanings, see bond (a disambiguation page). ...


Index funds versus active management

Main articles: Index fund and active management

An index fund maintains investments in companies that are part of major stock (or bond) indices, such as the S&P 500, while an actively managed fund attempts to outperform a relevant index through superior stock-picking techniques. The assets of an index fund are managed to closely approximate the performance of a particular published index. Since the composition of an index changes infrequently, an index fund manager makes fewer trades, on average, than does an active fund manager. For this reason, index funds generally have lower trading expenses than actively managed funds, and typically incur fewer short-term capital gains which must be passed on to shareholders. Additionally, index funds do not incur expenses to pay for selection of individual stocks (proprietary selection techniques, research, etc.) and deciding when to buy, hold or sell individual holdings. Instead, a fairly simple computer model can identify whatever changes are needed to bring the fund back into agreement with its target index. An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ...


The performance of an actively managed fund largely depends on the investment decisions of its manager. Statistically, for every investor who outperforms the market, there is one who underperforms. Among those who outperform their index before expenses, though, many end up underperforming after expenses. Before expenses, a well-run index fund should have average performance. By minimizing the impact of expenses, index funds should be able to perform better than average.


Certain empirical evidence seems to illustrate that mutual funds do not beat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics. One study found that nearly 1,500 U.S. mutual funds under-performed the market in approximately half of the years between 1962 and 1992.[7] Moreover, funds that performed well in the past are not able to beat the market again in the future (shown by Jensen, 1968; Grimblatt and Sheridan Titman, 1989.[8] Sheridan Titman holds the McAllister Centennial Chair in Financial Services at the University of Texas and is a research associate of the National Bureau of Economic Research. ...


Bond funds

Bond funds account for 18% of mutual fund assets. [9] Types of bond funds include term funds, which have a fixed set of time (short-, medium-, or long-term) before they mature. Municipal bond funds generally have lower returns, but have tax advantages and lower risk. High-yield bond funds invest in corporate bonds, including high-yield or junk bonds. With the potential for high yield, these bonds also come with greater risk. A bond fund is a fund that invests in bonds. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... “Taxes” redirects here. ... High yield debt (non-investment grade or junk bond) is a business term referring to a corporate debt instrument, usually a bond, that has a higher yield (compared to investment grade debt) because of a high perceived credit risk (default risk). ...


Money market funds

Money market funds hold 26% of mutual fund assets in the United States. [10] Money market funds entail the least risk, as well as lower rates of return. Unlike certificates of deposit (CDs), money market shares are liquid and redeemable at any time. The interest rate quoted by money market funds is known as the 7 Day SEC Yield. Money funds (or money market funds, money market mutual funds) are mutual funds that invest in short-term debt instruments. ... A certificate of deposit or CD is, in the United States, a time deposit, a familiar financial product, commonly offered to consumers by banks, thrift institutions, and credit unions. ... For other uses, see Liquid (disambiguation). ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ...


Funds of funds

Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds (i.e., they are funds comprised of other funds). The funds at the underlying level are typically funds which an investor can invest in individually. A fund of funds will typically charge a management fee which is smaller than that of a normal fund because it is considered a fee charged for asset allocation services. The fees charged at the underlying fund level do not pass through the statement of operations, but are usually disclosed in the fund's annual report, prospectus, or statement of additional information. The fund should be evaluated on the combination of the fund-level expenses and underlying fund expenses, as these both reduce the return to the investor.


Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although some invest in funds managed by other (unaffiliated) advisors. The cost associated with investing in an unaffiliated underlying fund is most often higher than investing in an affiliated underlying because of the investment management research involved in investing in fund advised by a different advisor. Recently, FoFs have been classified into those that are actively managed (in which the investment advisor reallocates frequently among the underlying funds in order to adjust to changing market conditions) and those that are passively managed (the investment advisor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis).


The design of FoFs is structured in such a way as to provide a ready mix of mutual funds for investors who are unable to or unwilling to determine their own asset allocation model. Fund companies such as TIAA-CREF, Vanguard, and Fidelity have also entered this market to provide investors with these options and take the "guess work" out of selecting funds. The allocation mixes usually vary by the time the investor would like to retire: 2020, 2030, 2050, etc. The more distant the target retirement date, the more aggressive the asset mix.


Hedge funds

Main article: Hedge fund

Hedge funds in the United States are pooled investment funds with loose SEC regulation and should not be confused with mutual funds. Some hedge fund managers are required to register with SEC as investment advisers under the Investment Advisers Act. [11] The Act does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments. Hedge funds typically charge a management fee of 1% or more, plus a "performance fee" of 20% of the hedge fund's profits. There may be a "lock-up" period, during which an investor cannot cash in shares. A hedge fund is a private investment fund charging a performance fee and typically open to only a limited range of qualified investors. ... A hedge fund is a private investment fund charging a performance fee and typically open to only a limited range of qualified investors. ...


Mutual funds vs. other investments

Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, who also benefit by having a third party (professional fund managers) apply their expertise, dedicate their time to manage and research investment options. However, despite the professional management, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market. A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ...


Share classes

Many mutual funds offer more than one class of shares. For example, you may have seen a fund that offers "Class A" and "Class B" shares. Each class will invest in the same pool (or investment portfolio) of securities and will have the same investment objectives and policies. But each class will have different shareholder services and/or distribution arrangements with different fees and expenses. 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 (sometimes referred to as "Class C" shares). Still a third class might have a minimum investment of $10,000,000 and be available only to financial institutions (a so-called "institutional" share class). In some cases, by aggregating regular investments made 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. [12]As a result, each class will likely have different performance results. [13] Class A can refer to: Class A war criminal - see war crime. ... Class B can mean either: Class B amplifier, a category of electronic amplifier Class B network, a type of Internet Protocol address This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... The 401(k) plan is a type of retirement plan available in the United States. ...


A multi-class structure offers investors the ability to select a fee and expense structure that is most appropriate for their investment goals (including the length of time that they expect to remain invested in the fund). [13]


Load and expenses

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. In this type of fund an investor pays no sales charge when purchasing shares, but will pay a commission out of the proceeds when shares are redeemed depending on how long they are held. Another derivative structure is a level-load fund, in which no sales charge is paid when buying the fund, but a back-end load may be charged if the shares purchased are sold within a year. As with any business, running a mutual fund involves costs, including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. ... A Stock broker sells or buys stock on behalf of a customer. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...


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. Shares of front-end load funds are frequently eligible for breakpoints (i.e., a reduction in the commission paid) based on a number of variables. These include other accounts in the same fund family held by the investor or various family members, or committing to buy more of the fund within a set period of time in return for a lower commission "today". The term financial intermediary may refer to an institution, firm or individual who performs intermediation between two or more parties in a financial context. ... A Financial Planner or Personal Financial Planner is a practicing professional who helps people to deal with various personal financial issues through proper planning, which includes but not limited to these major areas: tertiary education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and... To meet Wikipedias quality standards, this article or section may require cleanup. ...


It is possible to buy many mutual funds without paying a sales charge. These are called no-load funds. In addition to being available from the fund company itself, no-load funds may be sold by some discount brokers 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. The purchaser is therefore paying the fee indirectly through the fund's expenses deducted from profits.) To meet Wikipedias quality standards, this article or section may require cleanup. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...


No-load funds include both index funds and actively managed funds. The largest mutual fund families selling no-load index funds are Vanguard and Fidelity, though there are a number of smaller mutual fund families with no-load funds as well. Expense ratios in some no-load index funds are less than 0.2% per year versus the typical actively managed fund's expense ratio of about 1.5% per year. Load funds usually have even higher expense ratios when the load is considered. The expense ratio is the anticipated annual cost to the investor of holding shares of the fund. For example, on a $100,000 investment, an expense ratio of 0.2% means $200 of annual expense, while a 1.5% expense ratio would result in $1,500 of annual expense. These expenses are before any sales commissions paid to purchase the mutual fund. Vanguard is a United States investment management company that offers mutual funds and other financial products and services to individual and institutional investors in the United States and abroad. ... Fidelity Investments is a group of privately held companies in the financial services industry. ...


Many fee-only financial advisors strongly suggest no-load funds such as index funds. If the advisor is not of the fee-only type but is instead compensated by commissions, the advisor may have a conflict of interest in selling high-commission load funds. Fee-Only financial advisors , as defined by the review materials for the Certified Financial Planner exam, are compensated only by their clients and accept no commissions or compensation from other sources, such as insurance products or investments; rather, fee-only advisors charge only hourly or fixed fees (including retainers). ... A conflict of interest is a situation in which someone in a position of trust, such as a lawyer, a politician, or an executive or director of a corporation, has competing professional or personal interests. ...


Criticism of managed mutual funds

Historically, only a small percentage of actively managed mutual funds, over long periods of time, have returned as much, or more than comparable index mutual funds.[citation needed] Image File history File links Unbalanced_scales. ... Shortcut: WP:NPOVD Articles that have been linked to this page are the subject of an NPOV dispute (NPOV stands for Neutral Point Of View; see below). ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ...


Another criticism concerns sales commissions on load funds, an upfront or deferred fee as high as 8.5 percent of the amount invested in a fund (the average front-end load is no more than 5% normally[citation needed]). In addition, no-load funds may charge a 12b-1 fee in order to pay for "shelf space" with the company the investor uses for purchase of the fund (when the fund is bought from outside the fund family), but they do not pay a load. Critics[attribution needed] point out that high sales commissions can sometimes represent a conflict of interest, as high commissions benefit the sales people but hurt the investors. Although, "A shares", which have the highest front-end load, (around 5%) may be the cheapest for the investor, if the investor is planning on 1) keeping the fund for more than 5 years, 2) investing more than 100,000 in one fund family, which likely will qualify them for breakpoints,which is a form of discount, or 3) staying with that fund family for more than 5 years, but switching funds within the same fund company.[improper synthesis?] In this case, the front-end load may be best for the client, and at times outperform the no load or B or C shares.[improper synthesis?][dubious ] High commissions can sometimes cause sales people to recommend funds that maximize their income.[14] This might be solved by working with a fee-only advisor instead of a broker, where the investment advisor charges strictly for advise, and may avoid load funds entirely. We dont have an article called Load fund Start this article Search for Load fund in. ...


12b-1 fees, which are found on 70% of mutual funds[15] can motivate the fund company to focus on advertising to attract more and more new investors, as new investors would also cause the fund assets to increase, thus increasing the amount of money that the mutual fund managers make.[citation needed] Conceding this point, Schott argues that these fees "overall fund fees (of which distribution costs are a part) have declined by 50 percent" over the period 1980-2006. He further states the reason for these fees: "Rule 12b-1 lets investors pay over time for the bundle of valuable services they receive, rather than doing so through sales charges at the time of purchase." Schott continues with the assertion that, according to an ICI survey, 80% of investors consider these fees before purchasing an investment [16].


Fund managers may be encouraged to take more risks with investors' money than they ought to: fund flows (and therefore compensation[dubious ]) towards successful, market beating funds are much larger than outflows from funds that lose to the market.[citation needed] Fund managers may have an incentive to purchase high risk investments in the hopes of increasing their odds of beating the market and receiving the high inflows, with relatively less fear of the consequences of losing to the market.[citation needed]


Many analysts[attribution needed], however, believe that the larger the pool of money one works with, the harder it is to manage actively, and the harder it is to squeeze good performance out of it.[citation needed] This is due to there being only so many companies that one can identify to put the money into (buy shares of) that fit with the "style" of the mutual fund, due to what is disclosed in the propectus.[improper synthesis?] Thus some fund companies can be focused on attracting new customers and not close the mutual fund to new investments when they get too big to invest the assets properly, thereby hurting its existing investors' performance.[citation needed]


A great deal of a fund's costs are flat and fixed costs, such as the salary for the manager. Thus it can be more profitable for the fund to try to allow it to grow as large as possible, instead of limiting its assets.[citation needed] Most fund companies[attribution needed] have closed some funds to new investors to maintain the integrity of the funds for existing investors.[citation needed] If the funds reach more than 1 billion dollars[dubious ], many times, these funds have gotten too large before they are closed, and when this happens, the funds tend to not have a place to put the money and can and tend to lose value.[improper synthesis?]


Some funds[attribution needed] illegally[dubious ] are guilty of market timing[citation needed] (although many fund companies tightly control this). Some fund managers accept extravagant gifts in exchange for trading stocks through certain investment banks,[citation needed] which presumably charge the fund more for transactions than would non-gifting investment bank.[improper synthesis?] This practice, although done, is completely illegal.[citation needed] As a result, all fund companies strictly limit -- or completely bar -- such gifts.[citation needed] Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. ...


Scandals

In September 2003, the United States mutual fund industry was beset by a scandal in which several major fund companies permitted and facilitated late trading. Year 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... The mutual fund scandal of 2003 was the result of the discovery of both illegal and unethical trading practices on the part of certain hedge fund and mutual fund companies. ... After-hours trading or late trading refers to stock trading outside the traditional trading hours of the major exchanges, such as the New York Stock Exchange and the Nasdaq Stock Market. ...


See also

A closed-end fund is a collective investment scheme with a limited number of shares. ... Exchange-traded funds (or ETFs) are open-ended investment companies that can be traded at any time throughout the course of the day. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ... Investment management is the professional management of various securities (shares, bonds etc) assets (e. ... Money funds (or money market funds, money market mutual funds) are mutual funds that invest in short-term debt instruments. ... This is a list of mutual funds in the United States ordered by assets under management as of October 2007. ... The following is a limited list of mutual-fund families in the United States. ... Ranked by Canadian mutual fund assets under management (AUM), as of December 31, 2006 Categories: | | | ... The mutual fund scandal of 2003 was the result of the discovery of both illegal and unethical trading practices on the part of certain hedge fund and mutual fund companies. ... An open-end(ed) fund is a collective investment which can issue and redeem shares at any time. ... Socially responsible investing describes an investment strategy which combines the intentions to maximize both financial return and social good. ... A unit trust is a form of collective investment constituted under a trust deed. ... Value investing is a style of investment strategy from the so-called Graham & Dodd School. ...

References

  1. ^ US SEC answers on Mutual Funds. U.S. Securities and Exchange Commission (SEC). Retrieved on 2006-04-11.
  2. ^ Investment Companies. U.S. Securities and Exchange Commission (SEC). Retrieved on 2006-04-11.
  3. ^ Princeton Alumni Weekly article on pioneering work of John Bogle '51.
  4. ^ About ICI. Investment Company Institute (ICI). Retrieved on 2006-04-11.
  5. ^ Frequently Asked Questions About Bond Mutual Funds. Investment Company Institute. Retrieved on 2006-04-11.
  6. ^ U.S. Indexes: Construction & Methodology. Retrieved on 2006-04-23.
  7. ^ Mark Carhart (March 1997). "On Persistence in Mutual Fund Performance". Journal of Finance 52 (1): 56-82. 
  8. ^ M. Grimblatt and S. Titman (1989). "Mutual Fund Performance: an Analysis of Quarterly Portfolio Holdings". Journal of Business 62: 393-416. 
  9. ^ Frequently Asked Questions About Bond Mutual Funds. Investment Company Institute. Retrieved on 2006-04-11.
  10. ^ Frequently Asked Questions About Money Market Mutual Funds. Investment Company Institute. Retrieved on 2006-04-11.
  11. ^ Hedging Your Bets: A Heads Up on Hedge Funds and Funds of Hedge Funds. U.S. Securities and Exchange Commission (SEC). Retrieved on 2006-04-11.
  12. ^ Christine Benz. Which Is the Right Fund Share Class for You?. Morningstar (registration required). Retrieved on 2006-04-11.
  13. ^ a b Sources of Information Invest Wisely: An Introduction to Mutual Funds. U.S. Securities and Exchange Commission (SEC). Retrieved on 2006-04-11.
  14. ^ [http://www.sec.gov/news/press/2004-177.htm SEC, Edward Jones to Pay $75 Million to Settle Revenue Sharing Charges, SEC (2004)
  15. ^ [1]Stevens, P. S."Should the SEC's Rule 12b-1 Survive?", ICI Statements and Publications, 2007-10-14.
  16. ^ [2] "Understanding Investor Preferences for Mutual Fund Information," Investment Company Institute (2006)
  • Tamar Frankel & Lawrence A. Cunningham, The Mysterious Ways of Mutual Funds: Market Timing, Annual Review of Financial and Banking Law (2007)

  Results from FactBites:
 
Mutual Funds (696 words)
Mutual fund shares are "redeemable." This means that when mutual fund investors want to sell their fund shares, they sell them back to the fund (or to a broker acting for the fund) at their approximate NAV, minus any fees the fund imposes at that time (such as deferred sales loads or redemption fees).
Mutual funds are subject to SEC registration and regulation, and are subject to numerous requirements imposed for the protection of investors.
Mutual funds are regulated primarily under the Investment Company Act of 1940 and the rules and registration forms adopted under that Act.
Fool.com: Mutual Funds -- Basics Introduction (1088 words)
Every mutual fund issues a prospectus, which is written in the driest, most confusing, boring, tedious language possible, but which somewhere describes the fund's investment policies and objectives, risks, costs (very important -- that's why we put it in bold), historical performance data, and various other legalese-encrusted tidbits.
Index funds are distinct from actively managed mutual funds in that they do not involve any stock picking by supposedly skilled professionals -- they simply seek to replicate the returns of the specific index.
Definitely, absolutely, without question, mutual funds should be embarrassed by their performance over the past couple of years.
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