Mutual fundMutual fund is a form of collective investment that pools money from manyinvestors and invests their money in stocks, bonds, short-term money marketinstruments, and other securities. In a mutual fund, the manager trades the fund’sunderlying securities, realizing capital gains or losses, and collects the dividend orinterest income. The investment proceeds are then passed along to the individualinvestors.Mutual funds are purchased either: directly from a company or indirectly from asales agent, including securitie firms, banks and financial planners.Usage of Mutual fundMutual funds can invest in many different kinds of securities. The most commonare cash, stock, and bonds, but there are a lot of sub-categories. Stock funds, caninvest primarily in the shares of a particular industry, such as technology or utilities.These are called sector funds.Most mutual funds’ investment portfolios are continually adjusted by aprofessional manager, who forecasts the future performance of investmentsappropriate for the fund. A mutual fund is administered through a main managementcompany, which may hire or fire fund managers.Mutual funds are subject to a special set of regulatory, accounting, and tax rules.They are not taxed on their income as long as they distribute substantially all of it totheir shareholders. Also, the type of income they earn is often unchanged as it passesthrough to the shareholders. Mutual fund distributions of tax-free municipal bondincome are also tax-free to the shareholder.Types of mutual fundsThe term mutual fundis the name for an open-end investment company. Open-endmeans that, at the end of a day, the fund issues new shares to investors and buys backshares from investors wishing to leave the fund. Mutual funds can be structured ascorporations or business trusts.Exchange-traded fundsThe exchange traded fund (ETF), is often formulated as an open-end investment
company. ETFs is made of mutual funds and closed-end funds. An ETF usually tracksa stock index. Shares are issued by institutional investors in large blocks. Investorspurchase shares in small quantities through brokers at a small discount to the net assetvalue; this is how the institutional investor makes its profit. ETFs are more efficientthan traditional mutual funds and therefore tend to have lower expenses. ETFs aretraded throughout the day on a stock exchange, just like closed-end funds.20/03/07-04:33:39 Equity fundsEquity funds, are the most common type of mutual fund. Often equity funds focusinvestments on particular strategies and certain types of issuers. A stock fund or alsoknown as an equity fund is a fund that invests in stocks. These funds are typicallyheld in stock or cash.. The objective of an equity fund is long-term growth throughcapital appreciation, dividends and interest are also sources of revenue.Bond fundsBond funds account for 18% of mutual fund assets. Types of bond funds includs:• term-funds, which have a fixed set of time before they mature.• Municipal bond funds generally have lower returns, but have tax advantagesand lower risk.• High-yield bond funds invest in corporate bonds, including high-yield or junkbonds. These bonds also come with greater risk.Money market fundsMoney market funds are also known as the safest kind of mutual fund, howevertheir returns are so low, that they can’t beat inflation over time. Your money buyingpower becomes less valuable in a long run.A major innovation in the investment company industry has been the creation, andsubsequent phenomenal growth of money market funds, which are open-endinvestment companies whose portfolios consist of money market instruments.The reason money funds are so stable is because they invest in short-termsecurities like those issued by banks, the federal government or big companies. A bigadvantage of a money fund is that it is completely liquid. You can sell your shares in amoney fund at any time. Money market can be divided into two main groups: taxablefunds and tax-exempt funds.Funds of fundsFunds of funds (FoF) are mutual funds which invest in other underlying mutualfunds. These funds are typically funds which an investor can invest individually. Itwill charge a management fee which is smaller than that of a normal. The fund shouldbe evaluated on the combination of the fund-level expenses and underlying fundexpenses.20/03/07-04:33:39 Hedge funds“Hedge funds are funds which uses aggressive investing strategies to seek higherreturns. These funds are restricted by law to no more than 100 investors per fund, andas a result most hedge funds set exceptionally high minimum investment amounts. Aswith traditional mutual funds, investors in hedge funds pay a management fee. Thesefunds also collect a percentage of the profits (usually 20%).”Mutual Fund Basics, Less Popular Types of Mutual Funds – Part 1, by Investor GuideStaffAdvantages of Mutual Funds:In conclusion I would like to say that mutual funds is the right thing to choosebecause, first of all you are facing with a professional management of your money.Investors purchase funds because usually they do not have the time to manage theirown portfolio.Secondly, diversification, main idea about it is to invest into a large number of assetsso that a loss in any particular investment would be a minimum.Finally one of the biggest advantages is simplicity , because buying a mutual fund iseasy and the minimum investment is small.20/03/07-04:33:39 ReferencesMark Carhart (March 1997). “On Persistence in Mutual Fund Performance”. Journalof Finance 52 (1): 56-82.M. Grimblatt and S. Titman (1989). “Mutual Fund Performance: an Analysis ofHedgYour Christine Benz. Which Is the Right Fund Share Class for You?Morningstar (registration required). Retrieved on 2006-04-11.Sources of Information Invest Wisely: An Introduction to Mutual Funds U.S.Securities and Exchange Commission. (SEC). Retrieved on 2006-04-11.“Investments:analysis and management” 9th edition ( Charles P. Jones) N.J.: JohnWilley & sons, c2004U.S. Indexes: Construction and methodology. Retreived on 2006-04-23Hedging 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.AC111 Introduction to accounting and finance