American mutual funds
Mutual fund is quite a common term which is often used by people all across the globe but most often it has been seen that people do not know its proper meaning. What exactly are mutual funds? Technically speaking these can be termed as a collective investment that has money from many investors.
The firm or company has experts who invest this money in stock, bonds or other securities. Mutual funds are basically meant for a shorter period of time. After collecting money from various investors, the fund manager invests it in some form which could either give rise to capital profit or loss. In return the fund manager collects the dividend or the interest profit arising from the investment. What about those who invested their money.
Those who invested their money also get a fixed part of the profit. However the amount each investor will get is not fixed and is basically dependent on a value known as net asset value (NAV). Net asset value can be simply defined as the total value of the fund dividend divided by the number of shares purchased by the investors. This value is not calculated once or twice but is calculated on the daily basis.Mutual funds exist in almost all the country round the globe.
The only point is that their name differs from country to country. For instance, in United States of American mutual funds it is commonly referred to as open end company and is one of the three investment options for the people there. But apart from United States with the possible exception of Canada, most of the other country use mutual fund as the general term for collective investment.
Most often people believe that mutual funds are the only form of collective investment. This surely means that they are unaware of unit trusts and unitized insurance funds. These are basically prevalent in United Kingdom and Western Europe.Mutual fund manager had a lot many options when it comes to investing the money of the investors. The company would really like to choose the option that can fetch them maximum returns.
But the most common form when it comes to investing is stock, bonds and securities. However there are also other hundreds of categories. If we consider the example of stock funds then we would find that these can be invested in the shares of a particular industry such as technology or utilities. These are primarily known as sector funds. The other type of fund involved is bond fund.
The bond funds are classified on various basis such as the amount of risk involved which are categorized as high yield or junk bonds, investing grade or corporate bonds, type of issuers which are classified as government agencies, corporations or municipalities or the third criteria could be the time for the maturity of the bond which can be either short term or long term. Stock and bond funds can be invested in domestic funds also known as US securities, global funds-those containing both US and foreign securities or international funds which are those that consist primarily of foreign funds.
The question that arises at this point of time is that how do company or the firm decide which fund to invest in. This selection is largely handled by professional manager whose job is to supervise the investment portfolios and adjust it from time to time so as to get maximum profits. The other important job of a professional manager is to predict the future performance of investments that he seems appropriate for the fund. The manager must go for the option that he or she believes will most closely match the funds stated investment objective. There is one more company involved in this whole process whose job is to look after fund managers and take appropriate action i.e. hire or fire according to their performance.As every market and business is governed by some set of rules and regulations so is the case with mutual funds.
These are subject to a special set of regulatory, accounting and tax rules. The most interesting part is their tax rules. The mutual fund companies are not taxed on their income provided that they distribute substantial part of their income to their shareholders. The other point in this regard is that the type off income they earn remains unchanged as it passes through to the shareholders. The shareholder also gets benefited since he or she also does not have to pay any tax on income from municipal bonds. Taxable distributions can either be termed as ordinary income or capital gains which basically depends on the fact that how the fund earned it.As with any other company the mutual fund firm also has their own expenses.
The expenses can be broadly classified into three types that are: management fee, non-management expenses and 12b-1/Non-12b-1 fees. The management expense mainly caters for the amount charged by the advisor for giving his suggestions or ideas. Non-management expenses consists of transfer agent expenses, custodian expenses, legal/audit expenses, fund accounting expenses, registration expenses, Board of directors/trustees expenses and printing and postage expenses.
The last one is the 12b-1/Non-12b-1 fees is the contractual fee charged by the fund to cover the marketing expense. The measuring unit of all these expenses is same. All these expenses are expressed as a percentage of the average daily net assets of the fund.The mutual funds are also sometimes termed as open ended funds. The reason behind such a thing is that the investment management company sponsoring the fund at the end of every day issues new shares to investors and also buys back shares from ionvestors who wants toleave the fund. As far as the structure of mutual funds are concerned, they can be structured either as corporations or as business trusts. However in both the cases they are called as open-end investment companies as per the rule of SEC.
The last point with regard to mutual funds is that why should peope go for mutual funds when they have other options like stocks. The very reason for doing so is that mutual funds offer diversification and professional management. The risk involved in mutual funds is comparitively quite low since it generally holds investment in hundreds and thousands of stocks.
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