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Mutual Funds Essay

A mutual is a kind of investment-company that combines money from many investors and backers and invests the money in bonds, money-market instruments, stocks, other securities and sometimes even cash. A mutual fund in basic terms is a large group of people who lump their money together for management companies to invest. And, like most things in the world, there are fees and commissions involved. Mutual funds are managed by money managers, who capitalize the fund’s capital and try to produce capital gains and revenue for the fund’s investors. A mutual fund’s portfolio is organized and maintained to mimic the investment objectives defined in its catalogue. A mutual fund has many characteristics, which are listed below. Investors and backers purchase shares in the mutual fund from within the fund, or through a broker or fund agent, and cannot buy the shares from other backers on a secondary market such as the NASDAQ stock market or New York Stock Exchange.

The amount that investors purchase their mutual funds shares for is the estimated net asset value or NAV per share in addition to any fees that the fund may charge at the time of purpose, such as sales charges, also known as sales loads. Mutual fund shares are convertible, meaning when an investor wants to sale their shares, they sell them back to the mutual fund or to a broker working for the fund at the net asset value less any fees the mutual fund may charge, such as deferred sales loads or reclamation fees. Mutual funds commonly sell their shares on a continuous basis, although some funds will stop selling when, for instance, they reach a certain level of assets under management. The investment portfolio of a mutual fund is typically managed by separate entities known as investment advisors that are registered with the SEC.

Furthermore mutual funds themselves are registered with the SEC and subject to SEC regulation. There are many forms of mutual funds, which include index funds, stock funds, bond funds, and money market funds. Each type of mutual fund has a different investment objective, strategy and investment portfolio. Different mutual funds are also subject to different risks, volatility, and fees and expenses. Fees related to a mutual fund reduce returns on fund investments and are an important feature that investors should consider when buying mutual fund shares. Mutual funds come in two main types, categorized by how the fees are charged. The types are load mutual funds and no-load mutual funds. A load mutual fund charges for the shares/units purchased plus an initial transactions fee. The initial transaction fee is typically no more than 9% of the investment fund amount or can also be a standard fee contingent on the mutual fund provider.

This fee is added to your purchase as a sales fee. There are a couple different types of load funds out there. Back-end loads mean the fee is charged when you redeem the mutual fund. A front-end load is the opposite of a back-end load and means the fee is charged up front. A no-load fund means investors and backers can buy and redeem the mutual fund units/shares whenever without a commission or sales charge. Some companies such as banks and broker-dealers may charge fees and commissions for the transaction and exchange of mutual funds. Many no-load funds charge a fee if you redeem them early.

Most people endorse avoiding load funds altogether and studies have shown that load mutual funds and no load mutual funds offer the same return, however, one charges a commission fee. A 12B-1 fee is the yearly marketing or sharing fee on a mutual fund. The 12B-1 fee is treated as an operational expense and is incorporated in the fund’s expense ratio. The 12B-1 is usually between .25% – 1% of a fund’s net assets. The name of the fee comes from a segment of the Investment Company Act of 1940. An electronically traded fund or ETF is a security that follows an index, group of assets or commodity, but trades them like a stock on an exchange. Prices for ETFs change throughout the day when they are bought and sold. Because ETFs are traded like stock, they do not have NAVs calculated everyday.

References

1. “U.S. Securities and Exchange Commission Information on Mutual Funds”. U.S. Securities and Exchange Commission (SEC). Retrieved 2011-04-06.

2. Fink, Matthew P. (2008). The Rise of Mutual Funds. Oxford University Press. p. 9.


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