what is mutual fund?

Answer 1

A mutual fund is an investment vehicle that lets people pool their money into a fund to (hopefully) earn better returns because of a larger asset base. It also allows investors to reduce the risk in investing by the diversity a mutual fund provides by investing in a range of stocks, bonds, etc. For you it means picking one (or several) fund(s) and letting the fund manager do all the work of stock picking.

Answer 2

A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.

Answer 3

To simplify it. It is a pool of funds collected by certain investors. Now this money is invested by proffesionals who are known as Fund managers. So if you want to invest into market (Stock Market) but dont know about anything then you go through this vehicle in which a proffesional does all the intra day trading and you sit back and enjoy returns. But all Mutual funds are not good. Read through before investing.

Answer 4

It is a fund of money that has a fund manager and a team of traders investing that money to try and earn them and you a profit.

You as an investor in this fund, decide how you want your slice invested (low, medium, high risk stocks, property......etc)

Answer 5

A mutual fund is a collection of stocks or other investment vehicles including treasury bills or other assets. Investors in mutual funds can buy and own shares of the collection without actually owning individual stocks. Mutual funds are managed by "fund managers" or "money managers".

The advantages for individuals to buy shares in a mutual fund versus individual stocks are:

1.1 Diversity. For instance, if I had only $100 to invest I would be very limited in the number of stocks I could own -- maybe 5 or 6 at most. However, for $100 I could own a few shares of a mutual fund that invests in hundreds or thousands of different stocks (or other investment vehicles). Investment theory hinges on diversity which enables investors to isolate and leverage specific risks by combining investments.

1.2 Economies of scale. That same $100 would be killed with frictional costs of transactions. That is, there are transaction fees associated with buying and selling stock. At a discount brokerage you might pay $10 for each trade. That means to buy stocks with your $100 you would actually only have $90 worth of stocks to buy after paying the transaction costs. Then to sell the $90 (assuming it didn't change in value) you would only yield $80 after paying the $10 commission. Therefore, to invest $100 you will need that investment to grow considerably just to pay the trading commissions and get initial investment back. However, there are economies of scale for each transaction. The cost of selling or buying 10,000 shares is not substantially larger than the cost for smaller transactions. Therefore, mutual fund managers can trade in large transactions and the cost savings are enjoyed proportionately by the share holders.

1.3 Professional management. Most people have to spend most of their own time doing something other than analyzing the projected value of stocks they hold as well as those they might want to buy. It is very time consuming and most individuals find it burdensome to do effectively for more than a handful of investment vehicles. Therefore, when investors pool their money a small fraction of the value can be used to pay for professional management of that fund. (Management fees are sometimes thought to be a disadvantage of mutual funds. However, we'll assume the managers of the funds you invest in are good and their fees are reasonable. Most funds have some form of fees in the range of 0.5% to 2.0% of the total asset value.)

Now the downside or reasons why a mutual fund isn't always the best place to invest:

2.1 Control. There are some stocks that individuals know and understand well. For instance, someone who really understands the video game market may want to invest individually in the stock of a particular game company. In certain markets an individual might understand valuations and future earnings potential of companies as well as the professional money managers. In this case, an individual may want to specifically control exactly when and exactly how much is invested in the individual company.

2.2 Reach. Mutual funds have limitations in their by-laws which define the types of investments the fund will or will not make. While there are literally thousands of mutual funds that have a wide array of investment strategies, there just aren't any that will invest in Uncle Bob's local car wash. The minimum threshhold for most Mutual Funds is quite high -- usually investments are limited to publicly traded stocks or investment vehicles with a market cap of $200 million. There are lots of publicly traded companies that do not meet those threshholds and may be excellent investments. For those, you'll have to do your own homework. And remeber, most money in America is made by businesses like Uncle Bob's. Don't be shy to take some risks alongside Uncle Bob -- just keep some money with a safer investment like a mutual fund.

Answer 6

http://www.greenjungle.com/pub/education/edartmutualfund.html

Answer 7

A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. [1] In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or loss, 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 (NAV), is calculated daily based on the total value of the fund divided by the number of shares purchased by investors.

Legally known as an "open-end company", a mutual fund is one of three basic types of investment companies available in the United States. [2] Outside of the U.S., mutual fund is a generic term for various types of collective investment. In the UK and western Europe (including offshore jurisdictions) other forms of collective investment are prevalent including unit trusts, Open-Ended Investment Companies (OEICs), SICAVs and unitized insurance funds.
History
The first open-end mutual fund, Massachusetts Investors Trust 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.

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 SEC and provide prospective investors with a prospectus. The SEC (U.S. Securities and Exchange Commission) helped create the Investment Company Act of 1940 which provides the guidelines that all funds must comply with today.

In 1951, the number of funds surpassed 100 and the number of shareholders exceeded 1 million. Only in 1954 did the stock market finally rise above its 1929 peak and by the end of the fifties there were 155 mutual funds with $15.8 billion in assets. In 1967 funds hit their best year, one quarter earning at least 50% with an average return of 67%, but it was done by cheating using borrowed money, risky options, and pumping up returns with privately traded "letter stock". By the end of the 60's there were 269 funds with a total of $48.3 billion.

With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s there were around 270 funds with $48 billion in assets. The first retail index fund was released in 1976, called the First Index Investment Trust. It is now called the Vanguard 500 Index fund and is one of the largest mutual funds ever with in excess of $100 billion in assets.

One of the largest contributors of mutual fund growth was Individual Retirement Account (IRA) provisions made 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 (401k), IRAs and Roth IRAs.

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 USD.[3]

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 (high yield or junk bonds, investment-grade corporate bonds), type of issuers (government agencies, corporations, or municipalities), or maturity of the bonds (short or long term). Both stock and bond funds can invest in primarily US securities (domestic funds), both US 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 the future performance of investments appropriate for the fund and chooses the ones 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.

Mutual funds are subject 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 either be ordinary income or capital gains, depending on how the fund earned it.


Net asset value
The net asset value, or NAV, is a fund's value of its holdings, 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. Open-end funds sell and redeem their shares at the NAV, and so only process orders after the NAV is determined. Closed-end funds 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.

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.

Turnover
Turnover is a measure of the amount of securities that are bought and sold, usually in a year, and usually expressed as a percentage of net asset value. It shows how actively managed the fund is.

A caveat is that this value is sometimes calculated as the value of all transactions (buying, selling) divided by 2; i.e., the fund counts one security sold and another one bought as one "transaction". This makes the turnover look half as high as would be according to the standard measure.

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 very process of buying and selling securities also has its own costs, such as brokerage commissions, which are borne by the fund's shareholders.

The Dalbar Inc. consultancy studied stock mutual fund returns over the period from 1984 to 2000. Dalbar found that the average stock fund returned 14 percent; during that same period, the typical mutual fund investor had a 5.3 percent return.[4] This finding has made both "personal turnover" (buying and selling mutual funds) and "professional turnover" (buying mutual funds with a turnover above perhaps 5%) unattractive to some 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 investment management company sponsoring the fund issues new shares to investors and buys back shares from investors wishing to leave the fund.

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.

Other funds have a limited number of shares; these are either closed-end fund or unit investment trusts neither of which are mutual funds.


Exchange-traded funds
Main article: Exchange-traded fund
A relatively new innovation, the exchange traded fund (ETF), is often formulated as an open-end investment company. The way ETFs work combines characteristics of both mutual funds and closed-end funds. An ETF usually tracks a stock index (see Index funds). Shares are only created or redeemed by institutional investors in large blocks (typically 50,000 shares). Investors typically purchase shares in small quantities through brokers at a small premium or discount to the net asset value through which the institutional investor makes their profit. Because the institutional investors handle the majority of trades, ETFs are more efficient than traditional mutual funds and therefore tend to have lower expenses. ETFs are traded throughout the day on a stock exchange, just like closed-end funds.


Equity funds
Equity funds, which mainly consist of stock investments, are the most common type of mutual fund. Equity funds hold 49 percent of total funds invested in mutual funds in the United States. [5] Oftentimes equity funds focus investments on particular strategies and certain types of companies.


Capitalization
Some mutual funds focus investments on companies of particular size ranges, with size measured by their market capitalization. The size ranges include micro-cap , small-cap, mid-cap, and large-cap. Fund managers and other investment professionals have varying definitions of these market cap ranges. The following ranges are used by Russell Indexes [6] include:

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

Growth vs. value
Another division is between growth funds, which invest in stocks of companies that have the potential for large capital gains, versus value funds, which concentrate on stocks that are undervalued. Growth stocks typically have a potential for larger return, however such investments also bear larger risks. Growth funds tend not to pay regular dividends. Sector funds focus on specific industry sectors, such as biotechnology or energy. 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 investment in bonds, to stay more conservative when it comes to risk, yet aim for some growth.


Index funds versus active management
Main articles: Index fund, active management.
An index fund maintains investments in companies that are part of major stock 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.

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 be average. 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. [7] finds that nearly 1,500 U.S.A. mutual funds under-performed the market in approximately half the years between 1962 and 1992. 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 Titman, 1989.[8] However, as quantitative finance is in its early stages of development more accurate studies are required to reach a decisive conclusion.[citation needed]


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, 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.


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 certificate of deposits (CDs), assets in money market funds are liquid and redeemable at any time.


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. Certain hedge funds 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 fee greater than 1%, plus a "performance fee" of 20% of a hedge fund's profits. There may be a "lock-up" period, during which an investor cannot cash in shares.


Mutual funds vs. other investments
Mutual funds offer several advantages over stock investments, including diversification and professional management. A mutual fund may hold investments in hundreds or thousands of stocks, thus reducing risk of any particular stock. Also, the transaction costs associated with buying individual stocks are also spread around among all the mutual fund shareholders. As well, a mutual fund benefits from professional fund managers who can apply their expertise and dedicate time to research investment options. Mutual funds, however, are not immune to risks. Mutual funds share the same risks associated with the types of investments the fund makes. If the fund mainly invests in stocks, the mutual fund is usually subject to the same ups and downs and risks as the stock market.


Selecting a mutual fund
Picking a mutual fund from among the thousands offered is not easy. The following is just a rough guide, with some common pitfalls.

Check with your tax advisor prior to investing in a tax-exempt or tax-managed fund.
Match the term of the investment to the time you expect to keep it invested. Money you may need right away (for example, if your car breaks down) should be in a money market account. Money you will not need until you retire in decades (or for a newborn's college education) should be in longer-term investments, such as stock or bond funds. Putting money you will need soon in stocks risks having to sell them when the market is low and missing out on the rebound.
Expenses matter over the long term, and of course, cheaper is usually better. You can find the expense ratio in the prospectus. Expense ratios are critical in index funds, which seek to match the market. Actively managed funds need to pay the manager, so they usually have a higher expense ratio.
Sector funds often make the "best fund" lists you see every year. The problem is that it is usually a different sector each year (internet funds, anyone?). Also, some sectors are vulnerable to industry-wide events (airlines do come to mind). Avoid making these a large part of your portfolio.
Closed-end funds often sell at a discount to the value of their holdings. You can sometimes get extra return by buying these in the market. Hedge fund managers love this trick. This also implies that buying them at the original issue is usually a bad idea, since the price will often drop immediately.
Mutual funds often make taxable distributions near the end of the year. If you plan to invest money in the fund in a taxable account, check the fund company's website to see when they plan to pay the dividend; you may prefer to wait until afterwards if it is coming up soon.
Research. Read the prospectus, or as much of it as you can stand. It should tell you what these strangers can do with your money, among other vital topics. Check the return and risk of a fund against its peers with similar investment objectives, and against the index most closely associated with it. Be sure to pay attention to performance over both the long-term and the short-term. A fund that gained 53% over a 1-yr. period (which is impressive), but only 11% over a 5-yr. period should raise some suspicion, as that would imply that the returns on four out of those five years were actually very low (if not straight losses) as 11% compounded over 5 years is only 68%.
Diversification can reduce risk. Most people should own some stocks, some bonds, and some cash. Some of the stocks, at least, should be foreign. You might not get as much diversification as you think if all your funds are with the same management company, since there is often a common source of research and recommendations. Too many funds, on the other hand, will give you about the same effect as an index fund, except your expenses will be higher. Buying individual stocks exposes you to company-specific risks, and if you buy a large number of stocks the commissions may cost more than a fund will.
The compounding effect is your best friend. A little money invested for a long time equals a lot of money later.

Share class
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. As a result, each class will likely have different performance results. [12]

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 time that they expect to remain invested in the fund). [12]

Many mutual funds divide their assets up among multiple classes of shares. All of the assets of each class are effectively pooled for the purposes of investment management, but classes typically differ in the fees and expenses paid out of the fund's assets. 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 only be open to financial institutions (a so-called "institutional" class). In some cases, by aggregating regular investments 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. [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 a 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.

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 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".

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.)

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 of these 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 cost to the investor per year. 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 own the mutual fund.

Many fee-only financial advisors strongly suggest no-load funds such as index funds. If the advisor is not fee only but instead is compensated by commissions, the advisor may have a conflict of interest in selling high commission load funds.


Criticism of mutual funds
The primary criticism of actively managed mutual funds comes from the historical fact that, over long periods of time, most have not returned as much as an index fund would.

There are also other criticisms levied against mutual funds as a consequence of the first criticism. One critique covers the concept of the sales commission, an upfront or deferred fee as high as 8.5 percent of the amount invested in a fund. Critics point out high sales commissions represent a conflict of interest, as high commissions benefits the sales people, but hurt the investors. High commissions can also cause sales people to recommend funds that maximize their income.

Mutual funds are also seen by some to have a conflict of interest with regards to their size. Fund companies charges a management fee of anywhere between 0.5-2.5 percent of the funds total assets. Theoretically this could motivate the fund managers, since a well performing fund would cause the amount invested in the fund to rise and increasing the fee earned. It also could 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.

Many analysts believe however that the larger the pool of money one works with, the harder it is to manage actively, and harder to have good performance. Thus a fund company can be focused on attracting new customers, hurting its existing investors' performance. A great deal of the funds costs are flat and fixed costs, such as the salary for the manager. Thus it can be more profitable to the fund to try and allow it to grow as large as possible, instead of limiting its assets.

Other practices of mutual funds have been criticized from time to time, such as funds allowing market timing. More recent criticisms have focused on the fund managers accepting extravagant gifts in exchange for trading stocks through certain investment banks, who presumably overcharge the fund compared to what another, non-gifting investment bank would charge.

Scandals
In September 2003, the United States mutual fund industry was beset by a scandal in which major fund companies permitted and facilitated "late trading" and "market timing".