WHAT ARE MUTUAL FUNDS?
Mutual Funds are a type of Certified Managed Combined Investments Schemes that gathers money from many investors to buy Securities.
The term Mutual Funds is most commonly used for Collective Investment Schemes that are regulated and available to the general public. Mutual Funds are open-ended in nature.
Hedge Funds are not considered as any type of Mutual Funds.
Mutual Funds are identified by their Principal Investments. Mutual Funds are the 4th largest category of funds that are also known as Money Market Funds, Bonds or fixed income funds, stock or equity funds and hybrid funds.
Funds are also categorized as Index Based or Actively Managed.
In a Mutual Fund, investors pay the Funds Expenditure. A single Mutual Fund may give investors a choice of various combinations of expenses by offering different types of share combinations.
The Funds Manager is also called the Fund Sponsor or the Fund Management Company. The buying and selling of the funds’ investments in accordance with the Funds investment is the objective.
A Fund Manager has to be a Registered Investment Advisor. The Fund Manager manages the funds and has the same brand name. It is also known as a Fund Family or Fund Complex.
As long as Mutual Funds comply with the requirements that are established in the Internal Revenue Code, they will not be taxed on their income.
In addition to this, they must expand their investments, limit the ownership of voting securities, disperse most of their income to their investors annually and earn most of their income by investing in Securities and Currencies.
Mutual Funds can pass taxable income to their investors every year. The type of income that they earn remains unchanged as it gets transferred to the shareholders.
For e.g., Mutual Funds distributers of dividend income are described as dividend income by the investor. There is one exception. Net losses that are incurred by a Mutual Fund are not distributed or passed through Fund Investors.
Mutual Funds invest in various kinds of Securities. The various types of Securities that a particular fund may invest in, are mentioned in the Funds Prospectus. A Funds Prospectus explains the Funds investments’ objective, its approach and the permitted investments.
The objective of the investment describes the kind of income that the fund is looking for. For e.g., a “Capital Appreciation” Fund generally looks to earn most of its returns from the increase in prices of the securities it holds rather than from a dividend or the interest income.
The approach of the investment describes the criteria that the Fund manager may have used to select the investments for the funds.
The investment portfolio of a Mutual Funds investment is continuously monitored by the Funds’ portfolio manager or managers who are either employed by the Funds manager or the Sponsor.
ADVANTAGES OF MUTUAL FUNDS.
ü Increase in Diversification
ü Liquidity on a Daily Basis
ü Professional Investment Management
ü Capacity to participate in Investments that may be available only for Larger Investors
ü Convenience as well as Service
ü Government Oversight
ü Easier Comparison
DIFFERENT TYPES OF MUTUAL FUNDS.
1) Open-End Funds
2) Close-End Funds
3) Unit Investment Trusts
OPEN END FUNDS.
In Open-End Mutual Funds, one must be willing to buy back their shares from investors at the end of every business day at the net asset value that is calculated for that day.
Most of the Open-End funds also sell shares to the public on every business day. These shares are also priced at a particular Net Asset Value.
A professional investment manager will oversee the portfolio, while appropriately buying or selling securities.
The total investment in the funds will be variably based on share buying, share redemptions and fluctuations in the market variation. There are not legal limits on the number of shares that can be issued.
CLOSE END FUNDS.
Close-End Funds generally issue shares to the public just once, when they are created via an initial public offering. These shares are then listed for trading on Stock Exchange.
Investors, who do not any longer wish to invest in the funds, cannot sell their shares back to the funds. Instead, they must sell their shares to another investor in the market as the price which they will receive may be hugely different from its net asset value.
The price may be at a Premium to net asset value (higher than the net asset value) or more commonly at a lesser to net asset value (lower than the net asset value).
While dealing with Close End Funds, a professional investment manager will oversee the portfolio, while appropriately buying or selling securities.
UNIT INVESTMENT TRUSTS.
UIT or Unit Investment Trusts issue shares to the public just once, when they are created. The investors in turn can cash in on the shares directly with the fund or they may also sell their shares in the market.
Unit Investment Trusts or UITs do not have any professional investment managers. Their portfolio of Securities is established by the creation of the UITs. The portfolio does not undergo any changes.
Unit Investment Trusts or UITs, in general have a limited time span. Their life span is primarily limited at their creation.
