How Do Mutual Funds Work
February 3, 2010scfm 9 Comments »
How Funds are sold
Mutual Funds primarily depend upon individual agents and distribution companies to market their schemes to the investors. Nowadays, they also market their schemes directly.
The individual agents who sell schemes of various Mutual Funds also act as financial advisors to many investors. Hence they are required to clear various examinations before acting as an agent. Many Mutual Funds prefer to deal with distribution agency than individual agents as it is easier to manage. These distribution agencies, with their highly qualified executives, will be able to offer better financial advice than individual agents to the investors.
Nowadays, the sales officers and other employees of the investment companies directly approach the investors (particularly the high net worth individuals and corporate clients) to sell different schemes. However, most of the sales of Mutual Funds happen through other distribution route than from marketing directly.
Investment Policies
Every Mutual Fund has a specified investment policy which will be described in the Mutual Fund’s prospectus. A family of Mutual Funds will be managed by an Asset Management Company. This Asset Management Company will collect funds from investors and charge a management fee for operating them. They enable investors to invest across different market sectors and switch assets across funds while still benefiting from centralized record keeping.
The investment policies of different types of funds are as follows:
• Equity Funds. They invest in stock. However, they will hold 4% to 5% of their assets in money market securities to offer liquidity. Income funds will hold shares of firms giving high dividend yield and Growth funds will hold shares of firms that enable faster capital appreciation. Sector funds focus on a particular industry.
• Debt Funds. These funds invest in fixed-income securities. Different funds will concentrate on Treasury bills, corporate bonds, Mortgage-backed securities and other kinds of bonds. Some of the funds also specialize on maturity.
• Index Funds. Index funds buy shares that are included in a particular index in proportion to each share’s representation in that index. Investing in index funds is a passive strategy because the investors need not do any security analysis.
• Money Market Funds. These funds invest in short-term low-risk instruments of the money market. Since the liquidity is high, some of the funds even offer cheque writing facilities to their investors.
Apart from these funds there are many different varieties of funds with unique investment policies like the international funds which invest in different securities across the world, the balanced funds which minimize risk without compromising heavily on growth opportunities and current income and the flexible funds which depend on market timing.
For more information about how mutual funds work visit Mutual Funds and to know about investing in mutual funds visit Investing in Mutual Funds
Question about debt funding
Why is congress attaching the new debt ceiling to the war funding bill?They are raising the debt ceiling to $14 trillion, an amount we can never repay. They just raised it to 12 trillion in February. They aren't allowing debate about it by attaching it to the war funding. What could be raising our debt 2 trillion in 6 months?
The democrats could have begun funding the wars but have decided to keep borrowing for it. They've had 3 years to do something about that. Its on their shoulders now, not Bush.
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Tags: debt Funds, economy, equity funds, How Do Mutual Funds Work, Index Funds Money Market Funds
Posted on February 3rd, 2010 at 6:23 am
A bond is a loan to a borrower with a promise to repay principal plus interest to the lender.
A mutual fund is an investment that pools money of investors together, then gives it to a money manager than invests in a number of securities, such as stocks, bonds, money markets, real estate, precious metals, etc.
For now, I'd put that money in a savings account.
Posted on February 3rd, 2010 at 6:33 am
That first answer is spam. Don't click on it!
Bonds are like I owe you's.
Mutual funds pool money together from investors and give to a professional manager and they invest in stocks, bonds, and money markets.
Posted on February 3rd, 2010 at 12:58 pm
Unit Trusts 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.
Because they invest in a pool of investment tools, they are well-diversified instruments, and so have less risk than individual stocks and derivatives. Invested over time, these returns can compound to very attractive sums unlike savings. With the right funds and proper planning, you can reap good returns.
Depending on where you are from, you can get it from online distributors or brokerages.
Hope the information helps!
Posted on February 4th, 2010 at 5:56 pm
The first responder gave you an excellent answer, but I would like to elaborate a little. No load mutual funds indeed have somewhat high minimums to begin investing, some $1000 and some $2000 and some even more. If you do not feel comfortable investing so much all at once, there are funds with a front end load of about 5.75% where you can begin with a lesser amount of about $500. American Funds specifically. There are also closed end funds and index funds that trade like stocks. You buy and sell them just like a stock. You can buy 1, 5, 10, 100, or 1000 shares. There is no large minimum. There is however the brokerage fee. $7.00 to buy and $7.00 to sell at Scottrade.
There are many different kinds of mutual funds that you can buy. Ones that invest in large cap growth stocks, small cap growth socks, bonds, foreign stocks, you name it and there is probably a fund that invests in it.
Many funds do not perform too well, about 70%. So you have to be very selective in choosing the fund or funds that you wish to invest in. Morningstar rates funds from 1 star–poorest–to 5 stars–best, in their category. Yahoo finance carries these Morningstar ratings. But these are only open ended funds. For some odd reason they do not rate closed end funds.
Enclosed is a link to closed end and index funds.
http://www.etfconnect.com/
Since you are a newcomer, you will benefit from going to your library or book store and getting "Mutual funds for Dummies"
Many mutual funds have shown a long term annual return of better than 10%. That should give you an idea on how much profit you might make.
Posted on February 5th, 2010 at 6:11 am
A Mutual Fund is a company (a corporation that receives preferential tax treatment under the U.S. Internal Revenue Code) that combines investor’s money and generally purchases stocks, bonds other securities. A professional manager or a group of professional managers will make purchase decisions of securities on behalf of the investors. Investors in turn pay small fees to these managers.
Here is a good article on selecting Mutual Fund:
http://creating-wealth.blogspot.com/2007/06/how-to-select-mutual-fund.html
Posted on February 5th, 2010 at 4:25 pm
That would be the best site to start with.
Basically, a mutual fund is an investment vehicle that pools the money of investors and gives it to a manager that invests in stocks, bonds, cash, or a combination of stocks and bonds. Mutual funds also invest in commodities. You get dividends, stock dividends, and bond payments for holding shares of a mutual fund. The best funds to go for are no-load mutual funds that have expense ratios under 1%. Good luck.
Posted on February 5th, 2010 at 10:38 pm
A "closed-end fund," legally known as a "closed-end company," is one of three basic types of investment company. The two other basic types of investment companies are mutual funds and Unit Investments Trusts (UITs).
Here are some of the traditional and distinguishing characteristics of closed-end funds:
Closed-end funds generally do not continuously offer their shares for sale. Rather, they sell a fixed number of shares at one time (in the initial public offering), after which the shares typically trade on a secondary market, such as the New York Stock Exchange or the Nasdaq Stock Market.
The price of closed-end fund shares that trade on a secondary market after their initial public offering is determined by the market and may be greater or less than the shares’ net asset value (NAV).
Closed-end fund shares generally are not redeemable. That is, a closed-end fund is not required to buy its shares back from investors upon request. Some closed-end funds, commonly referred to as interval funds, offer to repurchase their shares at specified intervals.
The investment portfolios of closed-end funds generally are managed by separate entities known as "investment advisers" that are registered with the SEC.
Closed-end funds also are permitted to invest in a greater amount of "illiquid" securities than mutual funds. (An "illiquid" security generally is considered to be a security that can’t be sold within seven days at the approximate price used by the fund in determining NAV.) Because of this feature, funds that seek to invest in markets where the securities tend to be more illiquid are typically organized as closed-end funds.
Closed-end funds come in many varieties. They can have different investment objectives, strategies, and investment portfolios. They also can be subject to different risks, volatility, and fees and expenses.
Keep in mind that just because a fund had excellent performance last year does not necessarily mean that it will duplicate that performance. For example, market conditions can change and this year’s winning fund could be next year’s loser. To understand the factors you should consider before investing in a mutual fund, read Mutual Fund Investing: Look at More Than a Mutual Fund's Past Performance. In addition, you should carefully read all of a fund’s available information, including its prospectus and most recent shareholder report before purchasing mutual fund shares.
Closed-end funds are subject to SEC registration and regulation, and are subject to numerous requirements imposed for the protection of investors. Closed-end funds are regulated primarily under the Investment Company Act of 1940 and the rules adopted under that Act. Closed-end funds are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934. You can find the definition of "closed-end company" in Section 5 of the Investment Company Act.
Posted on February 6th, 2010 at 4:25 am
Mutual funds pool money from a group of investors and invest it with a certain pre-determined objective in mind. The management decisions are made by the fund manager. The group of investors then become the shareholders of the fund and are allotted shares(portions) of the fund. The price of each share is called the NAV and fluctuates on a daily basis based on the value of the underlying assets.
Mutual funds declare distributions (dividends or capital gains) each year, which are considered profits and therefore are taxable. In general, I go for funds that have no 12b-1 fee and no loads to keep overheads low.
Posted on February 6th, 2010 at 12:20 pm
mutual funds are just a pool of cash that investors give control of to a manager or group of managers. the goal is (typically) to preserve or grow that capital.
the returns on mutual funds are certainly not guaranteed. the returns depend on the types of investments you allow your manager to make, and the effectiveness of that manager and his support team. fees and expenses also factor into that equation.
in 5 years, you might have turned that 10k into 100k or 1m.
or, the fund might have failed by then, and you could have lost it all.
this is why you should take your time and do your research, so that you can find a fund where you are comfortable with the investment objectives, and the associated risks.