What are Mutual Funds?

Published by Thomas Herold in Investments

'Mutual Funds' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Mutual funds prove to be collective investment pools that are managed professionally. They derive their sometimes enormous capitals from the contributions of many different investors. These monies are then invested in a variety of investments and securities comprised of bonds, stocks, other mutual funds, money markets, and commodities like silver and gold.

Mutual funds all have a fund manager. His responsibility is to sell and buy the holdings of the fund according to the guidelines spelled out in the particular mutual fund’s prospectus. U.S. regulations require that all mutual funds registered with the governing SEC, or Securities and Exchange Commission, make distributions of practically all income and net gains made from selling securities to the investors minimally once a year. The majority of these mutual funds are furthermore overseen by trustees or boards of directors. Their job is to make certain that the fund is properly managed by its investment adviser for the investors of the funds ultimate good.

There are really a wide variety of different securities that mutual funds are permitted by the SEC to purchase. This is somewhat limited by the objectives spelled out in the prospectus of the fund, which is comprised of a great amount of useful information on the fund and its goals. While cash instruments, stocks, and bonds are the more common types of investments that they purchase, mutual funds might also buy exotic types of investments like forwards, swaps, options, and futures.

The investment objectives of mutual funds explain clearly the types of investments that the fund will purchase. As an example, if a fund’s objective claimed that it was attempting to realize capital appreciation through investing in U.S. company stocks regardless of their amount of market capitalization, then it would be a U.S. stock fund that purchased U.S company stocks.

Other mutual funds purchase specific market sectors or different industries. Utilities, technology, and financial service funds are examples of this. Such a fund is called a sector fund or specialty fund. There are also bond funds that purchase different kinds of bonds, like investment grade corporate bonds or high yield junk bonds. They can invest in the bonds issued by government agencies, municipalities, or companies.

They might also be divided up according to whether they purchase long term or short term maturities of bonds. These funds may also buy bonds or stocks of either domestic companies or global companies, or even international companies outside of the United States. Index funds are another type of mutual fund that attempts to match a certain market index’s performance over time. The S&P 500 index is an example of one on which index mutual funds are based. With this type of index fund, the mutual fund would find derivatives based on the S&P 500 stock index futures so that they could match the index’s performance as identically as possible.

To help investors better understand the type of fund that they are getting into, the SEC came out with a particular name rule in the 40’ Act that makes funds actually invest in minimally eighty percent of securities that actually match up with their name. So a fund called the New York Tax Free Bond Fund would have to use eighty percent or more of its funds to purchase investments of tax free bonds that New York State and its various agencies issued.

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The term 'Mutual Funds' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.