Mutual Funds
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually.
Since the Investment company act of 1940, a mutual fund is one of three basic types of Investment companies available in the United States
Mutual funds can invest in many kinds of securities. The most common are cash instruments, stocks, 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).
Most mutual funds’ investment portfolios are continually adjusted under the supervision of a professional manager, who forecasts cash flows into and out of the fund by investors, as well as 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 under an advisory contract with a management company, which may hire or fire fund managers.
Mutual funds are subject to a special set of regulatory, accounting, and tax rules. In the U.S., unlike most other types of business entities, they are not taxed on their income as long as they distribute 90% of it to their shareholders and the funds meet certain diversification requirements in the Internal Revenue Code. 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 tax-free to the shareholder. Taxable distributions can be either ordinary income or capital gains, depending on how the fund earned those distributions. Net losses are not distributed or passed through to fund investors.
Different Types of Mutual Funds
Aggressive growth mutual funds – seek maximum appreciation.
Growth & Income Funds – invest predominantly in common stocks of companies that offer a possibly consistent increase in value. These are long-term growth companies and a combination of dividend paying income companies.
Growth funds – invest in common stock of companies that offer a possible rise in share price. These are companies in the prime of their growth period.
Income Bond funds - seek to offer income and safety by investing in both corporate and government bonds.
Income – Equity – seeks income mostly by investing in companies with a consistent history of dividend payouts.
International Funds – seeks capital appreciation by investing in equity securities of companies located outside the United States.
Balanced Fund – has three objectives, moderate long-term growth of capital, moderate income, and moderate stability.
Index Fund – a fund that invests in a particular stock index. The Standard and Poor’s index (S&P 500), is a popular index. The S&P 500 represents 500 of the best managed companies on the stock exchange.
Aggressive growth mutual funds – seek maximum appreciation.
Growth & Income Funds – invest predominantly in common stocks of companies that offer a possibly consistent increase in value. These are long-term growth companies and a combination of dividend paying income companies.
Growth funds – invest in common stock of companies that offer a possible rise in share price. These are companies in the prime of their growth period.
Income Bond funds - seek to offer income and safety by investing in both corporate and government bonds.
Income – Equity – seeks income mostly by investing in companies with a consistent history of dividend payouts.
International Funds – seeks capital appreciation by investing in equity securities of companies located outside the United States.
Balanced Fund – has three objectives, moderate long-term growth of capital, moderate income, and moderate stability.
Index Fund – a fund that invests in a particular stock index. The Standard and Poor’s index (S&P 500), is a popular index. The S&P 500 represents 500 of the best managed companies on the stock exchange.
Discussion
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