A mutual fund is a professionally managed investment fund that pools money from many investors

to purchase securities. These investors may be retail or institutional in nature.

Mutual funds have advantages and disadvantages compared to direct investing in individual
securities. The primary advantages of mutual funds are that they provide economies of scale, a
higher level of diversification, they provide liquidity, and they are managed by professional investors.
On the negative side, investors in a mutual fund must pay various fees and expenses.
Primary structures of mutual funds include open-end funds, unit investment trusts, and closed-end
funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an
exchange. Some close- ended funds also resemble exchange traded funds as they are traded on
stock exchanges to improve their liquidity. Mutual funds are also classified by their principal
investments as money market funds, bond or fixed income funds, stock or equity funds, hybrid funds
or other. Funds may also be categorized as index funds, which are passively managed funds that
match the performance of an index, or actively managed funds. Hedge funds are not mutual funds;
hedge funds cannot be sold to the general public as they require huge investments. They are more
risky than mutual funds and are subject to different government regulations.

Early history[edit]
Further information: Financial history of the Dutch Republic
The first modern investment funds (the precursor of today's mutual funds) were established in
the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based
businessman Abraham (or Adriaan) van Ketwich formed a trust named Eendragt Maakt Magt ("unity
creates strength"). His aim was to provide small investors with an opportunity to diversify.[1][2]
Mutual funds were introduced to the United States in the 1890s. Early U.S. funds were generally
closed-end funds with a fixed number of shares that often traded at prices above the portfolio net
asset value. The first open-end mutual fund with redeemable shares was established on March 21,
1924 as the Massachusetts Investors Trust (it is still in existence today and is now managed by MFS
Investment Management).
In the United States, closed-end funds remained more popular than open-end funds throughout the
1920s. In 1929, open-end funds accounted for only 5% of the industry's $27 billion in total assets.
After the Wall Street Crash of 1929, the United States Congress passed a series of acts regulating
the securities markets in general and mutual funds in particular.

 The Securities Act of 1933 requires that all investments sold to the public, including mutual
funds, be registered with the SEC and that they provide prospective investors with
a prospectus that discloses essential facts about the investment.
 The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual
funds, report regularly to their investors. This act also created the Securities and Exchange
Commission, which is the principal regulator of mutual funds.
 The Revenue Act of 1936 established guidelines for the taxation of mutual funds.
 The Investment Company Act of 1940 established rules specifically governing mutual funds.
These new regulations encouraged the development of open-end mutual funds (as opposed to
closed-end funds).
Growth in the U.S. mutual fund industry remained limited until the 1950s, when confidence in the
stock market returned. By 1970, there were approximately 360 funds with $48 billion in assets.[3]
The introduction of money market funds in the high interest rate environment of the late 1970s
boosted industry growth dramatically. The first retail index fund, First Index Investment Trust, was
formed in 1976 by The Vanguard Group, headed by John Bogle; it is now called the "Vanguard 500
Index Fund" and is one of the world's largest mutual funds. Fund industry growth continued into the
1980s and 1990s.
According to Pozen and Hamacher, growth was the result of three factors:

1. A bull market for both stocks and bonds,

2. New product introductions (including funds based on municipal bonds, various industry
sectors, international funds, and target date funds) and
3. Wider distribution of fund shares, including through employee-directed retirement accounts
such as 401(k), other defined contribution plans and individual retirement accounts (IRAs.)
Among the new distribution channels were retirement plans. Mutual funds are now the
preferred investment option in certain types of fast-growing retirement plans, specifically
in 401(k), other defined contribution plans and in individual retirement accounts (IRAs), all of
which surged in popularity in the 1980s.[4]
In 2003, the mutual fund industry was involved in a scandal involving unequal treatment of fund
shareholders. Some fund management companies allowed favored investors to engage in late
trading, which is illegal, or market timing, which is a practice prohibited by fund policy. The scandal
was initially discovered by former New York Attorney General Eliot Spitzer and led to a significant
increase in regulation. In a study about German mutual funds Gomolka (2007) found statistical
evidence of illegal time zone arbitrage in trading of German mutual funds [5]. Though reported to
regulators BaFin never commented on these results.
Total mutual fund assets fell in 2008 as a result of the financial crisis of 2007–2008.

Mutual funds today[edit]

At the end of 2016, mutual fund assets worldwide were $40.4 trillion, according to the Investment
Company Institute.[6] The countries with the largest mutual fund industries are:

1. United States: $18.9 trillion

2. Luxembourg: $3.9 trillion
3. Ireland: $2.2 trillion
4. Germany: $1.9 trillion
5. France: $1.9 trillion
6. Australia: $1.6 trillion
7. United Kingdom: $1.5 trillion
8. Japan: $1.5 trillion
9. China: $1.3 trillion
10. Brazil: $1.1 trillion
In the United States, mutual funds play an important role in U.S. household finances. At the end of
2016, 22% of household financial assets were held in mutual funds. Their role in retirement savings
was even more significant, since mutual funds accounted for roughly half of the assets in individual
retirement accounts, 401(k)s and other similar retirement plans.[7] In total, mutual funds are large
investors in stocks and bonds.
Luxembourg and Ireland are the primary jurisdictions for the registration of UCITS funds. These
funds may be sold throughout the European Union and in other countries that have adopted mutual
recognition regimes.

Advantages and disadvantages to investors[edit]

Mutual funds have advantages and disadvantages compared to investing directly in individual
securities:
Advantages[edit]
 Increased diversification: A fund diversifies holding many securities.
This diversification decreases risk.
 Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings
back to the fund at regular intervals at a price equal to the net asset value of the fund's holdings.
Most funds allow investors to redeem in this way at the close of every trading day.
 Professional investment management: Open-and closed-end funds hire portfolio managers to
supervise the fund's investments.
 Ability to participate in investments that may be available only to larger investors. For example,
individual investors often find it difficult to invest directly in foreign markets.
 Service and convenience: Funds often provide services such as check writing.
 Government oversight: Mutual funds are regulated by a governmental body.
 Transparency and ease of comparison: All mutual funds are required to report the same
information to investors, which makes them easier to compare to each other.[8]
Disadvantages[edit]
Mutual funds have disadvantages as well, which include:

 Fees
 Less control over timing of recognition of gains
 Less predictable income
 No opportunity to customize[9]

Regulation and operation[edit]

United States[edit]
In the United States, the principal laws governing mutual funds are:

 The Securities Act of 1933 requires that all investments sold to the public, including mutual
funds, be registered with the SEC and that they provide potential investors with
a prospectus that discloses essential facts about the investment.
 The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual
funds, report regularly to their investors; this act also created the Securities and Exchange
Commission, which is the principal regulator of mutual funds.
 The Revenue Act of 1936 established guidelines for the taxation of mutual funds. Mutual funds
are not taxed on their income and profits if they comply with certain requirements under the
U.S. Internal Revenue Code; instead, the taxable income is passed through to the investors in
the fund. Funds are required by the IRS to diversify their investments, limit ownership of voting
securities, distribute most of their income (dividends, interest, and capital gains net of losses) to
their investors annually, and earn most of the income by investing in securities and
currencies.[10] The characterization of a fund's income is unchanged when it is paid to
shareholders. For example, when a mutual fund distributes dividend income to its shareholders,
fund investors will report the distribution as dividend income on their tax return. As a result,
mutual funds are often called "pass-through" vehicles, because they simply pass on income and
related tax liabilities to their investors.
 The Investment Company Act of 1940 establishes rules specifically governing mutual funds. The
focus of this Act is on disclosure to the investing public of information about the fund and its
investment objectives, as well as on investment company structure and operations.[11]
 The Investment Advisers Act of 1940 establishes rules governing the investment advisers. With
certain exceptions, this Act requires that firms or sole practitioners compensated for advising
others about securities investments must register with the SEC and conform to regulations
designed to protect investors.[12]
 The National Securities Markets Improvement Act of 1996 gave rulemaking authority to the
federal government, preempting state regulators. However, states continue to have authority to
investigate and prosecute fraud involving mutual funds.
Open-end and closed-end funds are overseen by a board of directors, if organized as a corporation,
or by a board of trustees, if organized as a trust. The Board must ensure that the fund is managed in
the interests of the fund's investors. The board hires the fund manager and other service providers to
the fund.
The sponsor or fund management company, often referred to as the fund manager, trades (buys and
sells) the fund's investments in accordance with the fund's investment objective. Funds that are
managed by the same company under the same brand are known as a fund family or fund complex.
A fund manager must be a registered investment adviser.

European Union[edit]
In the European Union, funds are governed by laws and regulations established by their home
country. However, the European Union has established a mutual recognition regime that allows
funds regulated in one country to be sold in all other countries in the European Union, but only if they
comply with certain requirements. The directive establishing this regime is the Undertakings for
Collective Investment in Transferable Securities Directive 2009, and funds that comply with its
requirements are known as UCITS funds.

Canada[edit]
Regulation of mutual funds in Canada is primarily governed by National Instrument 81-102 "Mutual
Funds", which is implemented separately in each province or territory. The Canadian Securities
Administrator works to harmonize regulation across Canada.[13]

Hong Kong[edit]
In the Hong Kong market mutual funds are regulated by two authorities:

 The Securities and Futures Commission (SFC) develops rules that apply to all mutual funds
marketed in Hong Kong.[14]
 The Mandatory Provident Funds Schemes Authority (MPFA) rules apply only to mutual funds
that are marketed for use in the retirement accounts of Hong Kong residents. The MPFA rules
are generally more restrictive than the SFC rules.[15]
Taiwan[edit]
In Taiwan, mutual funds are regulated by the Financial Supervisory Commission (FSC).[16]

Fund structures[edit]
There are three primary structures of mutual funds: open-end funds, unit investment trusts,
and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts
that trade on an exchange.

Open-end funds[edit]
Main article: Open-end fund
Open-end mutual funds must be willing to buy back ("redeem") their shares from their investors at
the net asset value (NAV) computed that day based upon the prices of the securities owned by the
fund. In the United States, open-end funds must be willing to buy back shares at the end of every
business day. In other jurisdictions, open-funds may only be required to buy back shares at longer
intervals. For example, UCITS funds in Europe are only required to accept redemptions twice each
month (though most UCITS accept redemptions daily).
Most open-end funds also sell shares to the public every business day; these shares are priced at
NAV.
Most mutual funds are open-end funds. In the United States at the end of 2016, there were 8,066
open-end mutual funds with combined assets of $16.3 trillion, accounting for 86% of the U.S.
industry.[7]

Closed-end funds[edit]
Main article: Closed-end fund
Closed-end funds generally issue shares to the public only once, when they are created through
an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who
want to sell their shares must sell their shares to another investor in the market; they cannot sell
their shares back to the fund. The price that investors receive for their shares may be significantly
different from NAV; it may be at a "premium" to NAV (i.e., higher than NAV) or, more commonly, at a
"discount" to NAV (i.e., lower than NAV).
In the United States, at the end of 2016, there were 530 closed-end mutual funds with combined
assets of $300 billion, accounting for 1% of the U.S. industry.[17]

Unit investment trusts[edit]

Main article: Unit investment trust
Unit investment trusts (UITs) are issued to the public only once when they are created. UITs
generally have a limited life span, established at creation. Investors can redeem shares directly with
the fund at any time (similar to an open-end fund) or wait to redeem them upon the trust's
termination. Less commonly, they can sell their shares in the open market.
Unlike other types of mutual funds, unit investment trusts do not have a professional investment
manager. Their portfolio of securities is established at the creation of the UIT.
In the United States, at the end of 2016, there were 5,103 UITs with combined assets of less than
$0.1 trillion.[17]

Exchange-traded funds[edit]
Main article: Exchange-traded fund
Exchange-traded funds (ETFs) are structured as open-end investment companies or UITs. ETFs
combine characteristics of both closed-end funds and open-end funds. ETFs are traded throughout
the day on a stock exchange. An arbitrage mechanism is used to keep the trading price close to net
asset value of the ETF holdings.
In the United States, at the end of 2016, there were 1,716 ETFs in the United States with combined
assets of $2.5 trillion, accounting for 13% of the U.S. industry.[7]

Classification of funds by types of underlying

investments[edit]
Mutual funds are normally classified by their principal investments, as described in the prospectus
and investment objective. The four main categories of funds are money market funds, bond or fixed
income funds, stock or equity funds, and hybrid funds. Within these categories, funds may be sub-
classified by investment objective, investment approach or specific focus.
The types of securities that a particular fund may invest in are set forth in the fund's prospectus, a
legal document which describes the fund's investment objective, investment approach and permitted
investments. The investment objective describes the type of income that the fund seeks. For
example, a capital appreciation fund generally looks to earn most of its returns from increases in the
prices of the securities it holds, rather than from dividend or interest income. The investment
approach describes the criteria that the fund manager uses to select investments for the fund.
Bond, stock, and hybrid funds may be classified as either index (or passively-managed) funds or
actively managed funds.

Money market funds[edit]

Main article: Money market fund
Money market funds invest in money market instruments, which are fixed income securities with a
very short time to maturity and high credit quality. Investors often use money market funds as a
substitute for bank savings accounts, though money market funds are not insured by the
government, unlike bank savings accounts.
In the United States, money market funds sold to retail investors and those investing in government
securities may maintain a stable net asset value of $1 per share, when they comply with certain
conditions. Money market funds sold to institutional investors that invest in non-government
securities must compute a net asset value based on the value of the securities held in the funds.
In the United States, at the end of 2016, assets in money market funds were $2.7 trillion,
representing 14% of the industry.[18]

Bond funds[edit]
Main article: Bond fund
Bond funds invest in fixed income or debt securities. Bond funds can be sub-classified according to:

 The specific types of bonds owned (such as high-yield or junk bonds, investment-
grade corporate bonds, government bonds or municipal bonds)
 The maturity of the bonds held (i.e., short-, intermediate- or long-term)
 The country of issuance of the bonds (such as U.S., emerging market or global)
 The tax treatment of the interest received (taxable or tax-exempt)
In the United States, at the end of 2016, assets in bond funds were $4.1 trillion, representing 22% of
the industry.[18]

Stock funds[edit]
Main article: Stock fund
Stock or equity funds invest in common stocks. Stock funds may focus on a particular area of the
stock market, such as

 Stocks from only a certain industry

 Stocks from a specified country or region
 Stocks of companies experiencing strong growth
 Stocks that the portfolio managers deem to be a good value relative to the value of the
company's business
 Stocks paying high dividends that provide income
 Stocks within a certain market capitalization range
In the United States, at the end of 2016, assets in Stock funds were $10.6 trillion, representing 56%
of the industry.[18]

Hybrid funds[edit]
Hybrid funds invest in both bonds and stocks or in convertible securities. Balanced funds, asset
allocation funds, target date or target risk funds, and lifecycle or lifestyle funds are all types of hybrid
funds.
Hybrid funds may be structured as funds of funds, meaning that they invest by buying shares in
other mutual funds that invest in securities. Many funds of funds invest in affiliated funds (meaning
mutual funds managed by the same fund sponsor), although some invest in unaffiliated funds (i.e.,
managed by other fund sponsors) or some combination of the two.
In the United States, at the end of 2016, assets in hybrid funds were $1.4 trillion, representing 7% of
the industry.[18]

Other funds[edit]
Funds may invest in commodities or other investments too.

Expenses[edit]
Investors in a mutual fund pay the fund's expenses. Some of these expenses reduce the value of an
investor's account; others are paid by the fund and reduce net asset value.
These expenses fall into five categories:

Management fee[edit]
Main article: Management fee
The management fee is paid by the fund to the management company or sponsor that organizes the
fund, provides the portfolio management or investment advisory services and normally lends its
brand to the fund. The fund manager may also provide other administrative services. The
management fee often has breakpoints, which means that it declines as assets (in either the specific
fund or in the fund family as a whole) increase. The fund's board reviews the management fee
annually. Fund shareholders must vote on any proposed increase, but the fund manager or sponsor
can agree to waive some or all of the management fee in order to lower the fund's expense ratio.
Index funds generally charge a lower management fee than actively-managed funds.

Distribution charges[edit]
Main article: Mutual fund fees and expenses
Distribution charges pay for marketing, distribution of the fund's shares as well as services to
investors. There are three types of distribution charges.

 Front-end load or sales charge. A front-end load or sales charge is a commission paid to
a broker by a mutual fund when shares are purchased. It is expressed as a percentage of the
total amount invested or the "public offering price", which equals the net asset value plus the
front-end load per share. The front-end load often declines as the amount invested increases,
through breakpoints. The front-end load is paid by the investor; it is deducted from the amount
invested.
 Back-end load. Some funds have a back-end load, which is paid by the investor when shares
are redeemed. If the back-end load declines the longer the investor holds shares, it is called a
contingent deferred sales charges (CDSC). Like the front-end load, the back-end load is paid by
the investor; it is deducted from the redemption proceeds.
 Distribution and services fee. Some funds charge an annual fee to compensate the distributor of
fund shares for providing ongoing services to fund shareholders. In the United States, this fee is
sometimes called a 12b-1 fee, after the SEC rule authorizing it. The distribution and services fee
is paid by the fund and reduces net asset value.
Distribution charges generally vary for each share class.

Securities transaction fees incurred by the fund[edit]

A mutual fund pays expenses related to buying or selling the securities in its portfolio. These
expenses may include brokerage commissions. These costs are normally positively correlated with
turnover.

Shareholder transaction fees[edit]

Shareholders may be required to pay fees for certain transactions, such as buying or selling shares
of the fund. For example, a fund may charge a flat fee for maintaining an individual retirement
account for an investor. Some funds charge redemption fees when an investor sells fund shares
shortly after buying them (usually defined as within 30, 60 or 90 days of purchase). Redemption fees
are computed as a percentage of the sale amount. Shareholder transaction fees are not part of the
expense ratio.

Fund services charges[edit]

A mutual fund may pay for other services including:

 Board of directors or trustees fees and expenses

 Custody fee: paid to a custodian bank for holding the fund's portfolio in safekeeping and
collecting income owed on the securities
 Fund administration fee: for overseeing all administrative affairs such as preparing financial
statements and shareholder reports, SEC filings, monitoring compliance, computing total returns
and other performance information, preparing/filing tax returns and all expenses of maintaining
compliance with state blue sky laws
 Fund accounting fee: for performing investment or securities accounting services and computing
the net asset value (usually every day the New York Stock Exchange is open)
 Professional services fees: legal and auditing fees
 Registration fees: paid to the SEC and state securities regulators
 Shareholder communications expenses: printing and mailing required documents to
shareholders such as shareholder reports and prospectuses
 Transfer agent service fees and expenses: for keeping shareholder records, providing
statements and tax forms to investors and providing telephone, internet and or other investor
support and servicing
 Other/miscellaneous fees
The fund manager or sponsor may agree to subsidize some of these charges.

Expense ratio[edit]
The expense ratio equals recurring fees and expenses charged to the fund during the year divided
by average net assets. The management fee and fund services charges are ordinarily included in
the expense ratio. Front-end and back-end loads, securities transaction fees and shareholder
transaction fees are normally excluded.
To facilitate comparisons of expenses, regulators generally require that funds use the same formula
to compute the expense ratio and publish the results.
No-load fund[edit]
In the United States, a fund that calls itself "no-load" cannot charge a front-end load or back-end
load under any circumstances and cannot charge a distribution and services fee greater than 0.25%
of fund assets

Controversy regarding fees and expenses[edit]

Critics of the fund industry argue that fund expenses are too high. They believe that the market for
mutual funds is not competitive and that there are many hidden fees, so that it is difficult for investors
to reduce the fees that they pay. They argue that the most effective way for investors to raise the
returns they earn from mutual funds is to invest in funds with low expense ratios.
Fund managers counter that fees are determined by a highly competitive market and, therefore,
reflect the value that investors attribute to the service provided. They also note that fees are clearly
disclosed.

Definitions of key terms[edit]

Average annual total return[edit]
Mutual funds in the United States are required to report the average annual compounded rates of
return for one-, five-and ten year-periods using the following formula:[19]
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
one-, five-, or ten-year periods at the end of the one-, five-, or ten-year periods (or fractional portion).

Market capitalization[edit]
Market capitalization equals the number of a company's shares outstanding multiplied by the market
price of the stock. Market capitalization is an indication of the size of a company. Typical ranges of
market capitalizations are:

 Mega cap - companies worth $200 billion or more

 Big/large cap - companies worth between $10 billion and $200 billion
 Mid cap - companies worth between $2 billion and $10 billion
 Small cap - companies worth between $300 million and $2 billion
 Micro cap - companies worth between $50 million and $300 million
 Nano cap - companies worth less than $50 million
Net asset value[edit]
Main article: Net asset value
A fund's net asset value (NAV) equals the current market value of a fund's holdings minus the fund's
liabilities (this figure may also be referred to as the fund's "net assets"). It is usually expressed as a
per-share amount, computed by dividing net assets by the number of fund shares outstanding.
Funds must compute their net asset value according to the rules set forth in their prospectuses. Most
compute their NAV at the end of each business day.
Valuing the securities held in a fund's portfolio is often the most difficult part of calculating net asset
value. The fund's board typically oversees security valuation.

Share classes[edit]
A single mutual fund may give investors a choice of different combinations of front-end loads, back-
end loads and distribution and services fee, by offering several different types of shares, known as
share classes. All of them invest in the same portfolio of securities, but each has different expenses
and, therefore, a different net asset value and different performance results. Some of these share
classes may be available only to certain types of investors.
Typical share classes for funds sold through brokers or other intermediaries in the United States are:

 Class A shares usually charge a front-end sales load together with a small distribution and
services fee.
 Class B shares usually do not have a front-end sales load; rather, they have a high contingent
deferred sales charge (CDSC) that gradually declines over several years, combined with a
high 12b-1 fee. Class B shares usually convert automatically to Class A shares after they have
been held for a certain period.
 Class C shares usually have a high distribution and services fee and a modest contingent
deferred sales charge that is discontinued after one or two years. Class C shares usually do not
convert to another class. They are often called "level load" shares.
 Class I are usually subject to very high minimum investment requirements and are, therefore,
known as "institutional" shares. They are no-load shares.
 Class R are usually for use in retirement plans such as 401(k) plans. They typically do not
charge loads, but do charge a small distribution and services fee.
No-load funds in the United States often have two classes of shares:

 Class I shares do not charge a distribution and services fee

 Class N shares charge a distribution and services fee of no more than 0.25% of fund assets
Neither class of shares typically charges a front-end or back-end load.

Portfolio Turnover[edit]
Portfolio Turnover is a measure of the volume of a fund's securities trading. It is expressed as a
percentage of average market value of the portfolio's long-term securities. Turnover is the lesser of a
fund's purchases or sales during a given year divided by average long-term securities market value
for the same period. If the period is less than a year, turnover is generally annualized.