Mutual
funds are a type of certified managed combined investment schemes that gathers
money from many investors to buy securities. There is no such accurate definition
of mutual funds, however the term is most commonly used for collective
investment schemes that are regulated and available to the general public and
open-ended in nature. Hedge funds are not considered as any type of mutual
funds.
Mutual
funds are identified by their principal investments. They are the 4th largest
category of funds that are also known as money market funds, bond 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 fund’s expenditure. There is some element of
doubt in these expenses. A single mutual fund may give investors a choice of
various combinations of these expenses by offering various different types of
share combinations.
The
fund manager is also known as the fund sponsor or fund management company. The
buying and selling of the fund’s investments in accordance with the fund’s
investment is the objective. A fund manager has to be a registered
investment advisor. The same fund manager manages the funds and has the same
brand name which is also known as a ‘fund family’ or ‘fund complex’.
As
long as mutual comply with requirements that are established in the internal
revenue code, they will not be taxed on their income. Clearly, 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 fund distributors of dividend income are described as dividend
income by the investor. There is an 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 fund’s prospectus,
which explain the fund’s investment’s 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 fund.
The
investment portfolio of a mutual fund’s investment is continuously monitored by
the fund’s portfolio manager or managers who are either employed by the fund’s
manager or the sponsor.
Advantages
of Mutual funds are:
1)
Increase in diversification.
2)
Liquidity on a daily basis.
3)
Professional investment management.
4)
Capacity to participate in investments that may be available only for larger
investors.
5)
Convenience as well as service.
6)
Government oversight.
7)
Easier comparison
Like
its advantages, the Mutual funds have disadvantages too. Here are some of them:
1)
High fees.
2)
Less control over timing of recognition of gains.
3)
Much lesser predictable income.
4)
No opportunity for customization.
There
are different types of Mutual funds as well. Here are some of them.
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 buying or selling securities whichever is appropriate. The total
investment in the funds will be variably based on share buying, share
redemptions and fluctuation in the market variation. There are also no 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 a stock
exchange. Investors, who don’t wish any longer 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 they may receive may be hugely
different from its net asset value. It 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). A professional investment manager will
oversee the portfolio, in buying or selling securities whichever is
appropriate.
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. UIT’s do not have
any professional investment managers. Their portfolio of securities is
established by the creation of the UIT’s and does not undergo any changes. UIT’s
in general having a limited life span, which is limited at their creation.
At
Angel Broking, we provide insights into various aspects on Mutual Funds. You
also can benefit by investing in Mutual Funds. For more details, please
contact: Tel: (022) 3935 7600 or SMS EBRO to 5757587.
