mutual fund (Mutual Fund) Is a form of collective investment, allowing investors (to shareholders) acquire a share (share) fund, thereby gaining access to his portfolio of assets. Simplified: mutual funds Is a Western analogue of Russian mutual investment funds (mutual funds).
How a mutual fund works looks like this. Investment company, establishing a mutual fund, sells shares to investors, and invests the funds received in a portfolio of securities. The choice of assets is determined by the investment objectives of the fund.
In general, mutual funds (mutual fund) open-ended funds are called (open-end funds). They have a large number of lobes, freely traded on the market. When an investor buys a share in a fund, he buys it from the fund itself, and when he sells this share, it also sells it to the foundation itself. In case of sale, the fund must pay him with money, reducing, thereby, its net assets. Sometimes a mutual fund can close itself to new investors, while existing shareholders can continue to buy new shares.
Mutual funds are managed by an investment company. They collect funds from many people and organizations and invest in stocks, bonds, options and other securities in the commodity and money markets. When an investor invests in such a fund, he buys a share in it and becomes its co-owner or shareholder, also how he becomes a co-owner of the enterprise, in case of buying a stock. The number of investment funds in the United States has exceeded 8000. Many of them boast a long history.. For example, Vanguard U Foundation. S. Growth Fund Investor Shares работает с 1959 G., а Dodge & Cox Income — с 1989 G. One of the oldest foundations Pioneer A is still in service., created back in 1928 G.
Closed-end funds (closed-end funds) - commonly known as investment trusts (investment trusts). They only raise funds once., through the initial public offering mechanism (Initial Public Offering). Then their shares are traded in the secondary and OTC markets. When you buy a share in such a fund, then the seller is not the fund itself, and another investor. When you sell a share of such a fund, you sell it to another investor, and not the fund itself. Shares of closed-end funds are traded on all major platforms (NYSE, NASDAQ and AMEX).
According to their investment goals, mutual funds can be divided into those, who invest in any type of securities and on those, which are limited to a specific purpose - for example, focus on investing in emerging market securities.
Types of Mutual Funds:
- Diversified Common Stock Funds (Diversified Equity Funds) - the portfolio of such a fund consists mainly of ordinary shares.
- Income Funds (Foundations, income oriented) - such funds invest in company shares, who pay high dividends.
- Balanced Funds (Balanced funds) - on a pro rata basis, such funds hold bonds in their portfolio, preferred and common shares.
- Bond Funds (Foundations, bond-oriented) - the assets of such funds are invested only in bonds for the purpose of stable income.
- Money Market Fund (Foundations, money market oriented) – these funds invest in short-term debt, such as commercial papers (for example, promissory notes) and bank deposits.
- Bond and Preferred Funds (Foundations, bond-oriented and preferred stocks) - the purpose of this type of funds is the current income and safety of depositors' funds.
- Specialized Funds (Specialized funds) - a large share of the assets of such a fund is invested in a specific industry. Sometimes even to a specific geographic area.
Price down (share) a mutual fund is determined by the net worth (NAV – Net Asset Value) fund. NAV is the total asset value of the fund, divided by the total number of beats. NAV is calculated once a day after the market closes at 16-00 US East Coast Time.
Protecting the interests of investors and investments in the United States is equally concerned, than in Russia. All funds are registered with the Securities and Exchange Commission (SEC), which strictly regulates and controls the activities of funds, focused on private investors. In particular, she requires foundations to regularly disclose information about their work, including on ongoing transactions, income received, etc.. P.
Controlling US Mutual Funds
The fund is controlled by an independent management company (OK), at the same time, the risks of the fund are insured against illegal actions by the employees of the management company.
Mutual funds are regulated by the Securities and Exchange Commission (U.S. Securities and Exchange Commission, SEC).
The custodian maintains and records the assets of the mutual fund. (depositary bank).
Mutual Funds Notify SEC of Investing Purposes and Vehicles, provide data on profitability and disclose statements. Besides, unlike investment banks and savings and loan organizations, mutual funds must:
- Have sufficient funds to redeem shares at the request of their owners.
- Evaluate your assets at the end of each trading day.
Due to the need to comply with these requirements, mutual funds are more transparent for investors and are considered by them as a reliable way of placing funds..
Types of Mutual Funds
Mutual funds are open (Open-ended Mutual Funds) and closed (Close-ended Mutual Funds) Sort of.
1. An open-ended mutual fund is constantly issuing new units (stock) and redeems them from shareholders. No load fund (No-load Mutual Fund) sells his shares (stock) no commission. Fund with load (Load Mutual Fund) sells his shares, charging a commission.
2. Closed-end mutual fund issues a limited number of units (Shares) and does not redeem them from shareholders.
| Closed-end mutual funds | Open-ended mutual funds |
| Issue a fixed number of shares | Issue an unlimited number of shares |
| Shares are traded on stock exchanges | Shares are bought and sold only through the fund |
| Shares can be traded at a higher price, below or equal to the net asset value * per share |
Shares are traded at a price, equal to the value of net assets* per share |
| The share price depends on the fundamental indicators of the fund's assets and the ratio of supply and demand in the market | The share price depends only on the fundamental indicators of the fund's assets |
* Net asset value (NAV) — Net Asset Value (ARE NOT) Is the current market value of the fund's net assets minus its liabilities, divided by the number of issued shares.
Types of Mutual Funds
By type (class) assets, in which mutual funds invest funds of shareholders, they are divided into:
- Equity funds (Stock Mutual Funds): 1. active (supported by managers); 1.2. passive index funds, copying the market index (Index Funds) and their variety - exchange-traded funds (ETFs).
- Bond funds (Bond Mutual Funds): 1. taxable (Taxable Bond Mutual Funds), investing in long-term government and corporate bonds; 2. tax exempt (Tax-free Bond Mutual Funds), investing in long-term municipal bonds.
- Balanced funds (Balanced Mutual Funds), investing in stocks and bonds.
- Money market funds (Money Market Funds): 1. taxable (Taxable Bond Mutual Funds), investing in short-term government and corporate debt securities; 2. tax exempt (Tax-free Bond Mutual Funds, investing in short-term state and municipal debt.
- Real estate funds, investing in commercial, residential and social real estate (REITs).
Mutual Fund Yield
The return of a mutual fund is the sum of its total return and operating costs.. In turn, the total income of the fund is determined on the basis of its dividend (percentage) income and change in the value of its net assets - NAV (Net Asset Value, ARE NOT) for period.
- When the price of assets in the fund's portfolio rises, and its total return is growing.. A decrease in the value of net assets leads to a decrease in the profitability of the fund.
An additional source of profitability of the fund is the reinvestment of dividends, received from shares in the asset portfolio. If dividends, paid by the fund, reinvested in the purchase of new securities, this contributes to the growth of its total profitability.
The cost of the fund reduces its total income and the profit of the investor. List of all costs and fees (Fees, Expenses & Loads) is given on the website and in the fund's prospectus (Fund ???Summary Prospectus). This is usually a fee for:
- active management (Management Fee);
- purchase and sale of shares (Transaction Fee);
- early repayment (sales) shares (Redemption Fee);
- decrease in account balance (Small Balance Fee);
as well as various fees:
- from the initial payment (Front-End Load);
- for additional service ( Service Fee);
- in the distribution of profits (Distribution Fees);
- by rule 12(b) -1 (12b-1 Fees).
SEC rule 12(b) -1 - an annual fee charged by some funds to cover the fund's marketing costs, as well as the costs of paying commissions to brokers. Set as a share of the value of the investors' assets and deducted from the fund's assets.
Cost burden
For the reason that, that open-ended mutual funds may charge a premium when buying units (funds with load), the investor should evaluate the effective load of such a fund. Its size can be determined by subtracting the NAV (ARE NOT) based on 1 share from the offer price.
For example, load value is 5% (0,05) share value, and the estimated value of a share in net assets of NAV (ARE NOT) — $30. Then:
Offer price = NAV per share / (1 - The magnitude of the load) = 30 / (1 — 0,05) = $31,58
Investor pays in excess of the price $1,58 ($30 -$31,58). At the same time, the value of the load as a percentage of the value of net assets per 1 share turns out to be higher 5%:
Effective load value = Load value / NAV based on 1 share = 1,58/30,00 = 5,27 %.
Important: the load may be charged when selling assets and exiting the fund, and also apply to reinvested dividends. Besides, many funds, positioning itself without load, can set such a high percentage under the rule 12(b)-1, that it resembles a hidden load.
Due to the significant amount of expenses, most mutual funds show returns below the market average.. As a result, more investors are opting for its low-cost alternative, the exchange-traded fund. (ETF).
Increase in income
The comparison table of open-ended and closed-end funds shows, what shares (stock) closed funds, unlike open funds, bought and sold not only in relation to net asset value (ARE NOT), but also taking into account market conditions and other indicators.
As a result, closed-end fund units may trade above or below their settlement value. (with a surcharge or with a discount to NAV). For an investor, this opportunity means additional benefits.. The surcharge or discount is calculated as follows.
- Allowance (a discount) = (Market price - NAV per 1 share) / NAV per 1 share
Important: investors should not purchase closed-end fund units during their initial offering (placement), better wait, until the portfolio is formed and its composition and profitability become known.
The reason for this is, that the purchase and sale of units of closed-end funds is carried out through brokers. For the sale of shares Brokers take a commission, and it can be very high, which will negatively affect the price of shares after the start of their circulation.
- For example, if a closed-end fund sells 1 million shares at a price $10 behind 1 share, and the broker's commission = 5%, then the fund will be able to attract for investment in assets only $9,5 million, and shares in this case are traded at a discount to the offer price.
Mutual fund investor taxes
For the reason that, that investment funds do not pay taxes, all income from securities and income from capital are distributed among its shareholders. Private investors in mutual funds pay taxes for dividends and capital gains.
When reinvesting dividends and income received back into the fund, these amounts are added to the underlying price of the assets and taxes are accrued and paid on them when the units are sold.
Whenever an investor buys shares in a fund, there are tax implications. Additional accumulated tax liabilities may arise when buying mutual fund units at the end of the year. If the fund has retained earnings at the end of the year, it will be included in the tax amount, even if the investor did not own the shares at the time of its receipt by the fund.
Mutual fund risks
The key risk of investing in a mutual fund is the risk of loss of invested capital as a result of a decrease in the value of its net assets.. The reason for this decline may be the quality of securities., change in interest rates, deterioration of the situation in the economy and in the market.
So, rise in interest rates leads to a decrease in stock and bond prices, reducing the NAV (ARE NOT) stock and bond funds. Lower interest rates drive up stock and bond prices and NAV (ARE NOT) stock and bond funds.
The quality of securities determines volatility (variability) share prices. The value of small stock funds and growth stocks rises in a bull market and declines in a bear market more often., than conservative stock funds of large companies.
In addition, investors, purchasing units of closed-end funds at the initial offer, take on additional risk, because they do not know the composition of its assets and cannot assess its effectiveness. This is related to, that managers begin to build portfolios only after, how primary investors will contribute to the fund through the purchase of shares.
