How to Buy Mutual Funds?

Is the time ripe to buy mutual funds?

Buying mutual funds have never been difficult even considering the complexities
involved in it. Mutual funds market has grown big enough in the last decade or so that it
has almost always out performed the stock market. This article throws light on:

How to pick a mutual fund from the huge pool of existing funds?
When you can sell the mutual funds?
How much you can earn from mutual funds?
Those of you who are looking to investing money in order that higher returns can be
made must have concluded stock market is too hot for you especially so when you are a
new and a novice investor. But sulking that you are loosing out on action while others are
walking to their banks merrily is not necessary. Take a look at the world of mutual funds.
Mutual funds market has grown big enough in the last decade or so that it has almost
always out performed the stock market. Yes, there is big money to be made in mutual
fund investment too provided you played your cards with aplomb.
How to Buy Mutual Funds?
Buying mutual funds have never been difficult even considering the complexities
involved in it. You can buy mutual funds as easily as 1-2-3. Here are the typical steps
involved when you want to buy mutual funds
You can buy mutual funds when mutual fund companies make initial public offerings. At
this time you will usually have to pay the basic face value and not the market dictated
price that includes a premium as in many cases. Filling out an application form with a
payment of some initial deposit is all it takes.
Buying mutual funds called closed end funds is from stock exchanges. Closed end funds
are initially sold by fund companies in limited numbers and they are listed in a stock
exchange to facilitate trading by investors. These will be usually at premium prices or as
dictated by demands in the market (higher demands for various reasons attract higher
premiums).
Buying mutual funds called closed end funds is from stock exchanges. Closed end funds
are initially sold by fund companies in limited numbers and they are listed in a stock
exchange to facilitate trading by investors. These will be usually at premium prices or as
dictated by demands in the market (higher demands for various reasons attract higher
premiums).
You can also buy mutual funds (open end funds - funds purchasable perpetually from the
company). Here the price at which you buy will be a figure called as NAV in the industry
circles. This term stands for net asset value, a figure that denotes the current value of a
share of the company after adding the earnings and deducting the expenses and taxes
equally amongst all the number of shares.
How do you mutual funds online? Most companies and banks that are in the mutual funds
business facilitate online buying of mutual funds to their customers. They need you to
have a trading as well as a demat account and connect your bank account to this. You can
log on to a broker's or the company's own trading internet portal to be able to buy online.
Once online you can choose from the array of exchange traded mutual funds (ETF) and
open end funds too. Your trades will be either credited or debited to your demat account
(an account to hold dematerialized shares - electronic form of shares) instantaneously.
This is some what like you can transfer funds from your bank account.
What Kind of Funds to Buy and how to pick From a Huge Pool of Existing funds?
Well. It is not easy to pick from a really huge pool of funds. Add to it the spate of new
public offers every now and then, to make things worse. But you have your objectives in
place. If it is making money, you sure would not want to go to money market funds in a
big way.
Stock Funds for Growth
You can bet a good chunk of your money on growth funds such as index funds and sector
funds. These are also called as stock funds in a broader sense. Stock funds come in
different varieties like index funds that invest and track specific index (S&P,
DOWJONES etc) and sector specific funds that invest and track for example automotive
sector. Do not pool your entire money in any one fund as it deprives you of growth
benefits of other funds.
401 (k) Plans
For retirement plans you can choose from many of the 401 (k) plans. These funds
appreciate in value over long periods and carry lesser risk compared to growth funds. It is
a tailor made fund for those looking for safer investment for retirement. The advantage
here is your employer makes an equal contribution to yours and your contribution is from
your before-tax salary. Your account will not be taxed until you withdraw thus paving
way for faster growth.
Balanced Funds
Balanced Funds or Managed Funds allocate assets in predetermined proportions among
government securities (bonds, T-Bills) for safety and in stocks for rapid growth.
Investment in stocks grow rapidly (rapid and higher growth are associated with risks too)
while government securities give a sort of cushion with their definite but slow growth.
Most funds let you switch allocation for a small fee. Exercise the switch over option
when growth falls behind your expectation.
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Inevstment on Market
Mutual funds are investment companies that pool money from investors at large and offer
to sell and buy back its shares on a continuous basis and use the capital thus raised to
invest in securities of different companies. This article helps you to know in depth on:

Is it possible to diversify investment if invested in mutual funds?

Find more on the working of mutual fund
Know more about the legal aspects in relation to the mutual funds
At the beginning of this millennium, mutual funds out numbered all the listed securities
in New York Stock Exchange. Mutual funds have an upper hand in terms of diversity and
liquidity at lower cost in comparison to bonds and stocks. The popularity of mutual funds
may be relatively new but not their origin which dates back to 18th century. Holland saw
the origination of mutual funds in 1774 as investment trusts before spreading to Anglo-
Saxon countries in its current form by 1868.

We will discuss now as to what are mutual funds before going on to seeing the
advantages of mutual funds. Mutual funds are investment companies that pool money
from investors at large and offer to sell and buy back its shares on a continuous basis and
use the capital thus raised to invest in securities of different companies. The stocks these
mutual funds have are very fluid and are used for buying or redeeming and/or selling
shares at a net asset value. Mutual funds posses shares of several companies and receive
dividends in lieu of them and the earnings are distributed among the share holders.
A Brief of How Mutual Funds Work
Mutual funds can be either or both of open ended and closed ended investment
companies depending on their fund management pattern. An open-end fund offers to sell
its shares (units) continuously to investors either in retail or in bulk without a limit on the
number as opposed to a closed-end fund. Closed end funds have limited number of
shares.

Mutual funds have diversified investments spread in calculated proportions amongst

securities of various economic sectors. Mutual funds get their earnings in two ways. First
is the most organic way, which is the dividend they get on the securities they hold.
Second is by the redemption of their shares by investors will be at a discount to the
current NAVs (net asset values).
Are Mutual Funds Risk Free and What are the Advantages?
One must not forget the fundamentals of investment that no investment is insulated from
risk. Then it becomes interesting to answer why mutual funds are so popular. To begin
with, we can say mutual funds are relatively risk free in the way they invest and manage
the funds. The investment from the pool is well diversified across securities and shares
from various sectors. The fundamental understanding behind this is not all corporations
and sectors fail to perform at a time. And in the event of a security of a corporation or a
whole sector doing badly then the possible losses from that would be balanced by the
returns from other shares.

This logic has seen the mutual funds to be perceived as risk free investments in the
market. Yes, this is not entirely untrue if one takes a look at performances of various
mutual funds. This relative freedom from risk is in addition to a couple of advantages
mutual funds carry with them. So, if you are a retail investor and planning an investment
in securities, you will certainly want to consider the advantages of investing in mutual
funds.
Lowest per unit investment in almost all the cases
Your investment will be diversified
Your investment will be managed by professional money managers
Continue to: What are the Laws Governing Mutual Funds

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International Mutual Funds: Don't miss the tremendous opportunity
Investing in international mutual funds is gaining popularity for various reasons. Rising
political stability merging or opening of borders and currencies are some of the reasons.
Vibrant and upcoming economies and non US corporations becoming financially stronger
by the day are some of the reasons. This article includes:

How one can invest in international mutual funds?

Why the number of funds in the international investing is on the rise?
What are the points to be analyzed before investing in international mutual funds?
Look at the GDP (gross domestic product) growth of US which while being good enough
for an advanced economy is a pale shadow of growth of GDPs of now developing
countries. A spell binding performance of almost one and a half decades has faded into
sidelines in comparison with the overseas stock markets. Two reasons stand out for this
interesting phenomenon.
Higher average age of US investors forces them into concentrating on mutual funds like
retirement plans (401 (k)) rather than the aggressive stock or index funds.
US have highest percentage (48%) of invested public (5 times more than Japan and about
twice more than Europe). This vacuum coupled with higher growth rate of GDP is
attracting the investment outside US.
Investing In International Mutual Funds
Investing in international mutual funds has two faces.
First is buying funds from US based companies that buy and manage portfolio in
internationally listed stocks/securities. These companies are governed by regulations of
SEC (Securities and Exchange Commission)
Second is buying mutual funds from international non US companies.
A word of caution before investing even in best international mutual funds - Unlike
domestic mutual funds investment, international investments entail additional risk factors
such as economic and political in addition to risk of FOREX value (simply put: foreign
currency exchange value) fluctuations.
Why Should You Invest In International Opportunities?
The number of funds in international investing is on the rise. We can cite a few reasons
for this.
Removal of trade barriers and expanding of economies have sparked off growth in many
non US companies.
Some of the major industries of the world are dominated by non US companies.
Over 72% of the world stocks are listed out side US.
Greater and true diversification and opportunity to capitalize on best overseas companies.
Investing in international mutual funds is gaining popularity for various reasons. Rising
political stability merging or opening of borders and currencies are some of the reasons.
Vibrant and upcoming economies and non US corporations becoming financially stronger
by the day are some of the reasons. In addition you get true diversification, balance and
opportunities.

Continue to: Investing In Foreign Funds: What Should You Look for?

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The Types before Investing in Mutual Funds

There is no one method of classifying mutual funds risk free or advantageous. However
we can do the same by way of classifying mutual funds as per their functioning and the
type of funds they offer to investors. This article makes you aware on:

What are the reasons that make the close ended mutual finds more attractive?
What are the factors that determine the prices of exchange traded funds?
Find out the features of open ended mutual funds
There is no one method of classifying mutual funds risk free or advantageous. However
we can do the same by way of classifying mutual funds as per their functioning and the
type of funds they offer to investors. If we took the middle path and classify broadly we
get the following list.
Open End Mutual Funds
All mutual funds by default and by definition are open end funds. Here an investor can
buy the shares at any point of time and exit from it at any time of his choice. Both buying
and selling will be at the current NAV subject to load factors where ever applicable.
Though this is a very broad category, one can easily say this is the most popular of the lot
looking at the ease with which one can liquidate his holding (exit from position by selling
or redemption to the trust/fund). Affordability is another key factor that decides the
popularity of open end funds. Those who can not afford high initial prices can buy with
low dollar values and even on a monthly basis.
Closed End Mutual Funds
Selling off of a specified and limited number of shares by the mutual funds at an initial
public offering is known as closed end mutual fund. However one important difference
between open end fund and closed end mutual fund is that the price of the latter is
decided by demand and supply of the stock in the market and not by NAVs unlike in the
former case. The pooled funds are utilized as per the mandate of the fund and Securities
and Exchange Commission's regulations. They are traded more like the general stocks.
Some of the reasons to invest in this category
Prices are determined by market demands and thus closed end funds trade at lower than
the offer price more often than not which is a perfect time for buying (at discounted
prices)
Like in the open end funds there are wide options for you to choose from. Like stock
funds, balanced funds that give full asset allocation benefit and thirdly the bond funds.
Exchange Traded Funds
The Exchange Traded Funds are a basket of stocks and trade like a normal security on
exchanges tracking index much like index funds. The prices of the ETFs are determined
by market forces and thus no NAVs can be fixed. The advantages of ETFs include buying
and selling like you can do with any stock traded on the exchange not excluding short
selling while you enjoy the diversification of an index fund. There no fees/loads on these
funds other than the commission you pay to the broker. There are many popular funds in
this class and one of them is SPDR that tracks S&P 500 index.

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.[1] 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 1940, there have been three basic types of investment companies in the United
States: open-end funds, also known in the U.S. as mutual funds; unit investment trusts
(UITs); and closed-end funds. Similar funds also operate in Canada. However, in the rest
of the world, mutual fund is used as a generic term for various types of collective
investment vehicles, such as unit trusts, open-ended investment companies (OEICs),
unitized insurance funds, and undertakings for collective investments in transferable
securities (UCITS).
Contents
[hide]

• 1 History
• 2 Usage
• 3 Net asset value
• 4 Average annual return
• 5 Turnover
• 6 Expenses and TERs
o 6.1 Management fees
o 6.2 Non-management expenses
o 6.3 12b-1/Non-12b-1 service fees
o 6.4 Investor fees and expenses
o 6.5 Brokerage commissions
• 7 Types of mutual funds
o 7.1 Open-end fund
o 7.2 Exchange-traded funds
o 7.3 Equity funds
 7.3.1 Capitalization
 7.3.2 Growth vs. value
 7.3.3 Index funds versus active management
o 7.4 Bond funds
o 7.5 Money market funds
o 7.6 Funds of funds
o 7.7 Hedge funds
• 8 Mutual funds vs. other investments
o 8.1 Share classes
o 8.2 Load and expenses
• 9 See also
• 10 References

• 11 Further reading

[edit] History

Massachusetts Investors Trust (now MFS Investment Management) was founded on

March 21, 1924, and, after one year, it 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 hindered 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 U.S.
Securities and Exchange Commission (SEC) and provide prospective investors with a
prospectus that contains required disclosures about the fund, the securities themselves,
and fund manager. The SEC helped draft the Investment Company Act of 1940, which
sets forth the guidelines with which all SEC-registered funds today must comply.

With renewed confidence in the stock market, mutual funds began to blossom. By the end
of the 1960s, there were approximately 270 funds with $48 billion in assets. The first
retail index fund, First Index Investment Trust, was formed in 1976 and headed by John
Bogle, who conceptualized many of the key tenets of the industry in his 1951 senior
thesis at Princeton University[2]. It is now called the Vanguard 500 Index Fund and is one
of the world's largest mutual funds, with more than $100 billion in assets.

A key factor in mutual-fund growth was the 1975 change in the Internal Revenue Code
allowing individuals to open individual retirement accounts (IRAs). Even people already
enrolled in corporate pension plans could contribute a limited amount (at the time, up to
$2,000 a year). Mutual funds are now popular in employer-sponsored "defined-
contribution" retirement plans such as (401(k)s) and 403(b)s as well as IRAs including
Roth IRAs.

As of October 2007, there are 8,015 mutual funds that belong to the Investment Company
Institute (ICI), a national trade association of investment companies in the United States,
with combined assets of $12.356 trillion.[3] In early 2008, the worldwide value of all
mutual funds totaled more than $26 trillion.[4]

[edit] Usage

Since the Investment Company Act of 1940, a mutual fund is one of three basic types of
investment companies available in the United States.[5]

Mutual funds can invest in many kinds of securities. The most common are cash
instruments, 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 (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.

[edit] Net asset value

Main article: Net asset value

The net asset value, or NAV, is the current market value of a fund's holdings, less the
fund's liabilities, 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. The public offering
price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and
redeem shares at the NAV, and so process orders only after the NAV is determined.
Closed-end funds (the shares of which are traded by investors) 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.

[edit] Average annual return

US mutual funds use SEC form N-1A to report the average annual compounded rates of
return for 1-year, 5-year and 10-year periods as the "average annual total return" for each
fund. The following formula is used:[6]

P(1+T)n = ERV

Where:

P = a hypothetical initial payment of $1,000.

T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning
of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional
portion).

[edit] Turnover

Turnover is a measure of the fund's securities transactions, usually calculated over a

year's time, and usually expressed as a percentage of net asset value.

This value is usually calculated as the value of all transactions (buying, selling) divided
by 2 divided by the fund's total holdings; i.e., the fund counts one security sold and
another one bought as one "turnover". Thus turnover measures the replacement of
holdings.

In Canada, under NI 81-106 (required disclosure for investment funds) turnover ratio is
calculated based on the lesser of purchases or sales divided by the average size of the
portfolio (including cash).

[edit] Expenses and TERs

Mutual funds bear expenses similar to other companies. The fee structure of a mutual
fund can be divided into two or three main components: management fee, non-
management expense, and 12b-1/non-12b-1 fees. All expenses are expressed as a
percentage of the average daily net assets of the fund.

[edit] Management fees

The management fee for the fund is usually synonymous with the contractual investment
advisory fee charged for the management of a fund's investments. However, as many
fund companies include administrative fees in the advisory fee component, when
attempting to compare the total management expenses of different funds, it is helpful to
define management fee as equal to the contractual advisory fee plus the contractual
administrator fee. This "levels the playing field" when comparing management fee
components across multiple funds.

Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single fee charged
to the fund, regardless of the asset size of the fund. However, many funds have
contractual fees which include breakpoints so that as the value of a fund's assets
increases, the advisory fee paid decreases. Another way in which the advisory fees
remain competitive is by structuring the fee so that it is based on the value of all of the
assets of a group or a complex of funds rather than those of a single fund.

[edit] Non-management expenses

Apart from the management fee, there are certain non-management expenses which most
funds must pay. Some of the more significant (in terms of amount) non-management
expenses are: transfer agent expenses (this is usually the person you get on the other end
of the phone line when you want to purchase/sell shares of a fund), custodian expense
(the fund's assets are kept in custody by a bank which charges a custody fee), legal/audit
expense, fund accounting expense, registration expense (the SEC charges a registration
fee when funds file registration statements with it), board of directors/trustees expense
(the members of the board who oversee the fund are usually paid a fee for their time
spent at meetings), and printing and postage expense (incurred when printing and
delivering shareholder reports).

[edit] 12b-1/Non-12b-1 service fees

In the United States, 12b-1 service fees/shareholder servicing fees are contractual fees
which a fund may charge to cover the marketing expenses of the fund. Non-12b-1 service
fees are marketing/shareholder servicing fees which do not fall under SEC rule 12b-1.
While funds do not have to charge the full contractual 12b-1 fee, they often do. When
investing in a front-end load or no-load fund, the 12b-1 fees for the fund are usually .
250% (or 25 basis points). The 12b-1 fees for back-end and level-load share classes are
usually between 50 and 75 basis points but may be as much as 100 basis points. While
funds are often marketed as "no-load" funds, this does not mean they do not charge a
distribution expense through a different mechanism. It is expected that a fund listed on an
online brokerage site will be paying for the "shelf-space" in a different manner even if not
directly through a 12b-1 fee.

[edit] Investor fees and expenses

Fees and expenses borne by the investor vary based on the arrangement made with the
investor's broker. Sales loads (or contingent deferred sales loads (CDSL)) are not
included in the fund's total expense ratio (TER) because they do not pass through the
statement of operations for the fund. Additionally, funds may charge early redemption
fees to discourage investors from swapping money into and out of the fund quickly,
which may force the fund to make bad trades to obtain the necessary liquidity. For
example, Fidelity Diversified International Fund (FDIVX) charges a 1 percent fee on
money removed from the fund in less than 30 days.

[edit] Brokerage commissions

An additional expense which does not pass through the statement of operations and
cannot be controlled by the investor is brokerage commissions. Brokerage commissions
are incorporated into the price of the fund and are reported usually 3 months after the
fund's annual report in the statement of additional information. Brokerage commissions
are directly related to portfolio turnover (portfolio turnover refers to the number of times
the fund's assets are bought and sold over the course of a year). Usually, higher rate of
portfolio turnover returns in higher brokerage commissions. The advisors of mutual fund
companies are required to achieve "best execution" through brokerage arrangements so
that the commissions charged to the fund will not be excessive.
[edit] Types of mutual funds

[edit] Open-end fund

The term mutual fund is the common name for what is classified as an open-end
investment company by the SEC. Being open-ended means that, at the end of every day,
the fund issues new shares to investors and buys back shares from investors wishing to
leave the fund.

Mutual funds must be structured as corporations or trusts, such as business trusts, and any
corporation or trust will be classified by the SEC as an investment company if it issues
securities and primarily invests in non-government securities. An investment company
will be classified by the SEC as an open-end investment company if they do not issue
undivided interests in specified securities (the defining characteristic of unit investment
trusts or UITs) and if they issue redeemable securities. Registered investment companies
that are not UITs or open-end investment companies are closed-end funds. Neither UITs
nor closed-end funds are mutual funds (as that term is used in the US).

[edit] Exchange-traded funds

Main article: Exchange-traded fund

A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an

open-end investment company. ETFs combine characteristics of both mutual funds and
closed-end funds. ETFs are traded throughout the day on a stock exchange, just like
closed-end funds, but at prices generally approximating the ETF's net asset value. Most
ETFs are index funds and track stock market indexes. Shares are issued or redeemed by
institutional investors in large blocks (typically of 50,000). Most investors purchase and
sell shares through brokers in market transactions. Because the institutional investors
normally purchase and redeem in in kind transactions, ETFs are more efficient than
traditional mutual funds (which are continuously issuing and redeeming securities and, to
effect such transactions, continually buying and selling securities and maintaining
liquidity positions) and therefore tend to have lower expenses.

Exchange-traded funds are also valuable for foreign investors who are often able to buy
and sell securities traded on a stock market, but who, for regulatory reasons, are limited
in their ability to participate in traditional U.S. mutual funds.

[edit] Equity funds

Equity funds, which consist mainly of stock investments, are the most common type of
mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the
United States. [7] Often equity funds focus investments on particular strategies and certain
types of issuers.
[edit] Capitalization

Fund managers and other investment professionals have varying definitions of mid-cap,
and large-cap ranges. The following ranges are used by Russell Indexes: [8]

• Russell Microcap Index - micro-cap ($54.8 - 539.5 million)

• Russell 2000 Index - small-cap ($182.6 million - 1.8 billion)
• Russell Midcap Index - mid-cap ($1.8 - 13.7 billion)
• Russell 1000 Index - large-cap ($1.8 - 386.9 billion)

[edit] Growth vs. value

Another distinction is made between growth funds, which invest in stocks of companies
that have the potential for large capital gains, and value funds, which concentrate on
stocks that are undervalued. Value stocks have historically produced higher returns;
however, financial theory states this is compensation for their greater risk. Growth funds
tend not to pay regular dividends. 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 level of investment in bonds, to stay
more conservative when it comes to risk, yet aim for some growth.[citation needed]

[edit] Index funds versus active management

Main articles: Index fund and active management

An index fund maintains investments in companies that are part of major stock (or bond)
indexes, 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.

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. One study found that nearly 1,500 U.S. mutual funds under-
performed the market in approximately half of the years between 1962 and 1992.[9]
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 Sheridan Titman, 1989).[10]

[edit] Bond funds

Bond funds account for 18% of mutual fund assets. [11] Types of bond funds include term
funds, which have a fixed set of time (short-, medium-, or 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.

[edit] Money market funds

Money market funds hold 26% of mutual fund assets in the United States. [12] Money
market funds entail the least risk, as well as lower rates of return. Unlike certificates of
deposit (CDs), money market shares are liquid and redeemable at any time.

[edit] Funds of funds

Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds
(i.e., they are funds comprised of other funds). The funds at the underlying level are
typically funds which an investor can invest in individually. A fund of funds will
typically charge a management fee which is smaller than that of a normal fund because it
is considered a fee charged for asset allocation services. The fees charged at the
underlying fund level do not pass through the statement of operations, but are usually
disclosed in the fund's annual report, prospectus, or statement of additional information.
The fund should be evaluated on the combination of the fund-level expenses and
underlying fund expenses, as these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor),
although some invest in funds managed by other (unaffiliated) advisors. The cost
associated with investing in an unaffiliated underlying fund is most often higher than
investing in an affiliated underlying because of the investment management research
involved in investing in fund advised by a different advisor. Recently, FoFs have been
classified into those that are actively managed (in which the investment advisor
reallocates frequently among the underlying funds in order to adjust to changing market
conditions) and those that are passively managed (the investment advisor allocates assets
on the basis of on an allocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a ready mix of mutual funds
for investors who are unable to or unwilling to determine their own asset allocation
model. Fund companies such as TIAA-CREF, American Century Investments, Vanguard,
and Fidelity have also entered this market to provide investors with these options and
take the "guess work" out of selecting funds. The allocation mixes usually vary by the
time the investor would like to retire: 2020, 2030, 2050, etc. The more distant the target
retirement date, the more aggressive the asset mix.

[edit] Hedge funds

Main article: Hedge fund

Hedge funds in the United States are pooled investment funds with loose SEC regulation,
unlike mutual funds. Some hedge fund managers are required to register with SEC as
investment advisers under the Investment Advisers Act. [13] 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 management fee of 1% or
more, plus a “performance fee” of 20% of the hedge fund's profit. There may be a "lock-
up" period, during which an investor cannot cash in shares. A variation of the hedge
strategy is the 130-30 fund for individual investors.

[edit] Mutual funds vs. other investments

Mutual funds offer several advantages over investing in individual stocks. For example,
the transaction costs are divided among all the mutual fund shareholders, which allows
for cost-effective diversification. Investors may also benefit by having a third party
(professional fund managers) apply expertise and dedicate time to manage and research
investment options, although there is dispute over whether professional fund managers
can, on average, outperform simple index funds that mimic public indexes. Yet, the Wall
Street Journal reported that separately managed accounts (SMA or SMAs) performed
better than mutual funds in 22 of 25 categories from 2006 to 2008. This included beating
mutual funds performance in 2008, a tough year in which the global stock market lost
US$21 trillion in value. [14] [15] In the story, Morningstar, Inc said SMAs outperformed
mutual funds in 25 of 36 stock and bond market categories. Whether actively managed or
passively indexed, mutual funds are not immune to risks. They share the same risks
associated with the investments made. If the fund invests primarily in stocks, it is usually
subject to the same ups and downs and risks as the stock market.

[edit] Share classes

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. 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 be available only to financial institutions (a so-called "institutional"
share class). In some cases, by aggregating regular investments made 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. [16]As a result, each class will
likely have different performance results. [17]
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 length of time that they
expect to remain invested in the fund). [17]

[edit] Load and expenses

Main article: Mutual fund fees 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 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 (i.e., a 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. The purchaser is therefore paying the fee
indirectly through the fund's expenses deducted from profits.)

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 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 annual
cost to the investor of holding shares of the fund. 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 purchase the mutual fund.

Many fee-only financial advisors strongly suggest no-load funds such as index funds. If
the advisor is not of the fee-only type but is instead compensated by commissions, the
advisor may have a conflict of interest in selling high-commission load funds.
closed-end fund, or closed-ended fund is a collective investment scheme with a limited
number of shares.

New shares are rarely issued after the fund is launched; shares are not normally
redeemable for cash or securities until the fund liquidates. Typically an investor can
acquire shares in a closed-end fund by buying shares on a secondary market from a
broker, market maker, or other investor as opposed to an Open-end fund where all
transactions eventually involve the fund company creating new shares on the fly (in
exchange for either cash or securities) or redeeming shares (for cash or securities).

The price of a share in a closed-end fund is determined partially by the value of the
investments in the fund, and partially by the premium (or discount) placed on it by the
market. The total value of all the securities in the fund divided by the number of shares in
the fund is called the net asset value (NAV) per share. The market price of a fund share is
often higher or lower than the per share NAV: when the fund's share price is higher than
per share NAV it is said to be selling at a premium; when it is lower, at a discount to the
per share NAV.

In the U.S. legally they are called closed-end companies and form one of three SEC
recognized types of investment companies along with mutual funds and unit investment
trusts. Other examples of closed-ended funds are Investment trusts in the UK and Listed
investment companies in Australia.

Initial offering

Like a company going public, a closed-end fund will have an

initial public offering of its shares at which it will sell, say,
10 million shares for $10 each. That will raise $100 million
for the fund manager to invest. At that point, however, the
fund's 10 million shares will begin to trade on a secondary
market, typically the NYSE or the AMEX for American
closed-end funds. Any investor who wishes to buy or sell
fund shares at that point will have to do so on the
secondary market. Excluding exceptional circumstances,
closed-end funds do not redeem their own shares. Nor,
typically, do they sell more shares after the IPO (although
they may issue preferred stock, in essence taking out a loan
secured by the pNet asset value

The price per share, or NAV (net asset value), is calculated by dividing the fund's assets
minus liabilities by the number of shares outstanding. This is usually calculated at the end
of every trading day.

ortfolio).
A fund derivative is a financial structured product related to a fund, normally using the
underlying fund to determine the payoff. This may be a mutual fund or a hedge fund.
Purchasers might want exposure to a fund to get exposure to a star fund manager or
management style as well as the asset class.

Typical fund derivatives might be a call option on a fund, a CPPI on a fund, or a

leveraged note on a fund. More complicated structures might be a guarantee sold to a
fund that ensures it cannot fall in value by more than a certain amount. Maturities might
range from three to ten years. The big players in this field are BNP Paribas, Societe
Generale, Barclays, Deutsche Bank, Citigroup, Credit Suisse, etc.

Fund derivatives have had explosive growth over the past 10 years but are still a major
growth area. New structures are constantly being developed to suit market and client
opportunities.

A prospectus is a legal document that institutions and businesses use to describe the
securities they are offering for participants and buyers. A prospectus commonly provides
investors with material information about mutual funds, stocks, bonds and other
investments, such as a description of the company's business, financial statements,
biographies of officers and directors, detailed information about their compensation, any
litigation that is taking place, a list of material properties and any other material
information. In the context of an individual securities offering, such as an initial public
offering, a prospectus is distributed by underwriters or brokerages to potential investors.