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{{About|mutual funds in the United States and Canada|other forms of mutual investment|Collective investment scheme}} |
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is a professionally-managed type of [[collective investment scheme]] that pools money from many investors to buy [[stock]]s, [[Bond (finance)|bonds]], short-term [[money market]] instruments, and/or other securities.<ref>{{cite web|url=http://www.sec.gov/answers/mutfund.htm |title=US SEC answers on Mutual Funds |publisher=U.S. Securities and Exchange Commission (SEC)|accessdate=2006-04-11}}</ref> A mutual fund has a [[fund manager]] that [[trade (financial instrument)|trades]] (buys and sells) the fund's investments in accordance with the fund's investment objective. |
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In the United States, a mutual fund is registered with the [[Securities and Exchange Commission]] (SEC) and is overseen by a [[board of directors]] (if organized as a corporation) or [[trustee|board of trustees]] (if organized as a trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. Under [[Internal Revenue Service]] (IRS) rules, a U.S. mutual fund must distribute effectively all of its net income and net realized gains from the sale of securities at least annually. |
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Since 1940, with the passage of the [[Investment Company Act of 1940]] (the '40 Act), there have been three basic types of registered [[investment company|investment companies]] in the United States: [[open-end fund]]s (or mutual funds), [[unit investment trust]]s (UITs); and [[closed-end fund]]s. Recently, [[exchange-traded fund]]s (ETFs), which are a type of open-end fund or unit investment trust that trades on an exchange, have gained in popularity. [[Hedge funds]] are not considered a type of mutual fund; while they are another type of commingled investment scheme, they are not governed by the [[Investment Company Act of 1940]] and are not required to register with the Securities and Exchange Commission. |
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In the rest of the world, ''mutual fund'' is used as a generic term for various types of collective investment vehicles available to the general public, such as [[unit trust]]s, open-ended investment companies ([[OEIC]]s, pronounced "oyks"), [[Unitised insurance fund|unitized insurance funds]], [[UCITS]] (Undertakings for Collective Investment in Transferable Securities, pronounced "YOU-sits") and [[SICAV]]s (''société d'investissement à capital variable'', pronounced "SEE-cavs"). |
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==History== |
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The first open-end mutual fund, the Massachusetts Investors Trust was created by [[MFS Investment Management]] on March 21, 1924. After one year, it had 200 [[shareholders]] and $392,000 in assets. The entire industry, which included a few [[closed-end fund]]s, represented less than $10 million in 1924. |
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The [[Wall Street Crash of 1929|stock market crash of 1929]] hindered the growth of mutual funds. In response to the stock market crash, [[Congress of 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 [[Securities and Exchange Commission]] (SEC) and that they provide prospective investors with a [[Prospectus (finance)|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, while the [[Investment Company Act of 1940]] governs their structure. |
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When confidence in the stock market returned in the 1950s, the mutual fund industry began to grow again. By the end of the 1960s, there were approximately 270 funds with $48 billion in assets. 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 Group|Vanguard 500 Index Fund]] and is one of the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011. <ref>{{cite web|url=https://personal.vanguard.com/us/FundsSnapshot?FundId=0040&FundIntExt=INT|title=Vanguard - 500 Index Fund Investor Shares |publisher=The Vanguard Group|accessdate=2011-02-22}}</ref> Fund industry growth continued into the 1980s and 1990s, as a result of three factors: a [[bull market]] for both stocks and bonds, new product introductions (including [[municipal bond|tax-exempt bond]], sector, international and [[target date fund|target date]] funds) and wider distribution of fund shares. 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)]] and other [[defined contribution plan]]s and in [[individual retirement accounts]] (IRAs), all of which surged in popularity in the 1980s. Total mutual fund assets fell in 2008 as a result of the [[credit crisis of 2008]]. |
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As of December 2009, there were 7,691 mutual funds in the United States with combined assets of $11.121 trillion, according to the [[Investment Company Institute]] (ICI), a national trade association of investment companies in the United States. The ICI reports that worldwide mutual fund assets were $22.964 trillion on the same date. <ref>{{cite web|url=http://www.icifactbook.org/|title=2010 Investment Company Fact Book|publisher=Investment Company Institute|accessdate=2011-02-22}}</ref> |
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==Usage, investment objectives== |
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Since the [[Investment Company Act of 1940]], a mutual fund is one of three basic types of [[investment company|investment companies]] available in the [[United States]].<ref>{{cite web|url=http://www.sec.gov/answers/mfinvco.htm |title=Investment Companies |publisher=U.S. Securities and Exchange Commission (SEC)|accessdate=2006-04-11}}</ref> |
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Mutual funds may invest in many kinds of [[Security (finance)|securities]] (subject to its investment objective as set forth in the fund's [[prospectus (finance)|prospectus]], which is the legal document under SEC laws which offers the funds for sale and contains a wealth of information about the fund). The most common securities purchased are "cash" or money market instruments, [[stock]]s, [[Bond (finance)|bond]]s, other mutual fund shares and more exotic instruments such as [[Derivative (finance)|derivatives]] like [[Forward contract|forwards]], [[Futures contract|futures]], [[Option (finance)|options]] and [[Swap (finance)|swaps]]. |
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Some funds' investment objectives (and or its name) define the type of investments in which the fund invests. For example, the fund's objective might state "...the fund will seek capital appreciation by investing primarily in listed equity securities (stocks) of U.S. companies with any market capitalization range." This would be "stock" fund or a "domestic/US stock" fund since it stated U.S. companies. A fund may invest primarily in the [[shares]] of a particular industry or market sector, such as [[technology]], utilities or financial services. These are known as specialty or 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). |
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Since fund names in the past may not have provided a prospective investor a good indication of the type of fund it was, the SEC issued a rule under the '40 Act which aims to better align fund names with the primary types of investments in which the fund invests, commonly called the "name rule". Thus, under this rule, a fund must invest under normal circumstances in at least 80% of the securities referenced in its name. for example, the "ABC New Jersey Tax Free Bond Fund" would generally have to invest, under normal circumstances, at least 80% of its assets in tax-exempt bonds issued by the state of New Jersey and its political subdivisions. Some fund names are not associated with specific securities so the name rule has less relevance in those situations. For example, the "ABC Freedom Fund" is such that its name does not imply a specific investment style or objective. Lastly, an index fund strives to match the performance of a particular market index, such as the [[S&P 500]] Index. In such a fund, the fund would invest in securities and likely specific derivates such as S&P 500 stock index futures in order to most closely match the performance of that index. |
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Most mutual funds' investment [[Portfolio (finance)|portfolios]] are continually monitored by one or more employees within the sponsoring [[Registered Investment Advisor|investment adviser or management company]], typically called a [[portfolio manager]] and their assistants, who invest the funds assets in accordance with its investment objective and trade securities in relation to any net inflows or outflows of investor capital (if applicable), as well as the ongoing performance of investments appropriate for the fund. A mutual fund is advised by the investment adviser under an advisory contract which generally is subject to renewal annually. |
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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. |
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==Net asset value== |
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{{Main|Net asset value}} |
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The ''net asset value'', or NAV, is the current market value of a fund's holdings, minus the fund's liabilities, that is 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. |
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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 [[derivative (finance)|derivative]]s; 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. |
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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. |
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==Average annual return== |
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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:<ref>{{cite web|url=http://www.sec.gov/rules/final/33-7512f.htm#E12E2 |title=Final Rule: Registration Form Used by Open-End Management Investment Companies: Sample Form and instructions |publisher=U.S. Securities and Exchange Commission (SEC)|accessdate=2008-09-25}}</ref> |
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:P(1+T)<sup>n</sup> = ERV |
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Where: |
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:P = a hypothetical initial payment of $1,000. |
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:T = average annual total return. |
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:n = number of years. |
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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). |
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==Turnover== |
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''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. |
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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. |
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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). |
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==Expenses and expense ratios== |
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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<!-- WHAT ARE THESE? ARE THESE U.S. TERMS NOT APPLICABLE TO OTHER COUNTRIES?-->. All expenses are expressed as a percentage of the average daily net assets of the fund. |
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===Management fees=== |
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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. |
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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.. |
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===Non-management expenses=== |
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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 buy/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). |
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===12b-1/Non-12b-1 service fees=== |
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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. |
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===Investor fees and expenses=== |
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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 included in the fund's total expense ratio (TER) because they 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 Investments|Fidelity Diversified International Fund]] (FDIVX) charges a 10 percent fee on money removed from the fund in less than 30 days. |
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===Brokerage commissions=== |
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An additional expense which does not pass through the fund's income statement (statement of operations) and cannot be controlled by the investor is [[Commission (remuneration)|brokerage commissions]]. Brokerage commissions are incorporated into the price of securities bought and sold and, thus, are a component of the gain or loss on investments. They are a true, real cost of investing though. The amount of commissions incurred by the fund and are reported usually 4 months after the fund's fiscal year end in the "statement of additional information" which is legally part of the [[Prospectus (finance)|prospectus]], but is usually available only upon request or by going to the SEC's or fund's website. Brokerage commissions, usually charged when securities are bought and again when sold, are directly related to portfolio turnover which is a measure of trading volume/velocity (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 (trading) generates 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 as well as also attaining the best possible price upon buying or selling. |
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==Types of mutual funds== |
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===Open-end fund, forms of organization, other funds=== |
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The term ''mutual fund'' is the common name for what is classified as an open-end investment company by the SEC. Being [[Open-end fund|open-ended]] means that, at the end of every day, the fund continually issues new [[share (finance)|share]]s to investors buying into the fund and must stand ready to buy back shares from investors redeeming their shares at the then current net asset value per share. |
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Mutual funds must be structured as [[corporation]]s or trusts, such as [[Massachusetts business trust|business trust]]s, 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 it does not issue undivided interests in specified securities (the defining characteristic of [[unit investment trust]]s or UITs) and if it issues redeemable securities. Registered investment companies that are not UITs or open-end investment companies are [[closed-end fund]]s. Closed-end funds are like open end except they are more like a company which sells its shares a single time to the public under an [[initial public offering]] or "IPO". Subsequently, the fund's shares trade with buyers and sellers of shares in the secondary market at a market-determined price (which is likely not equal to net asset value) such as on the New York or American Stock Exchange. Except for some special transactions, the fund cannot continue to grow in size by attracting more investor capital like an open-end fund may. |
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===Exchange-traded funds=== |
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{{Main|Exchange-traded fund}} |
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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 fund]]s and track [[stock market index]]es. Shares are issued or redeemed by institutional investors in large blocks (typically of 50,000). Most investors buy and sell shares through brokers in market transactions. Because the institutional investors normally purchase and redeem in [[payment in kind|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. |
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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. |
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===Equity funds=== |
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[[Equity fund]]s, 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.<ref name="Investment Company Institute">{{cite web|url=http://www.ici.org/funds/abt/faqs_bond_funds.html |title=Frequently Asked Questions About Bond Mutual Funds |publisher=Investment Company Institute |accessdate=2006-04-11 |archiveurl = http://web.archive.org/web/20060108182807/http://www.ici.org/funds/abt/faqs_bond_funds.html <!-- Bot retrieved archive --> |archivedate = 2006-01-08}}</ref> Often equity funds focus investments on particular strategies and certain types of issuers. |
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====Market Cap(italization)==== |
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[[Fund manager]]s and other investment professionals have varying definitions of [[mid-cap]], and [[large-cap]] ranges. The following ranges are used by [[Russell Indexes]]:<ref>{{cite web|title=U.S. Indexes: Construction & Methodology |url=http://web.archive.org/web/20070126193736rn_1/www.russell.com/Indexes/about/construction_methodology/US/russell_us_indexes_methodology.asp |accessdate=2006-04-23}}</ref> |
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* Russell Microcap Index – micro-cap ($54.8 – 539.5 million) |
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* [[Russell 2000]] Index – small-cap ($182.6 million – 1.8 billion) |
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* [[Russell Midcap]] Index – mid-cap ($1.8 – 13.7 billion) |
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* [[Russell 1000]] Index – large-cap ($1.8 – 386.9 billion) |
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====Growth vs. value==== |
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Another distinction is made between [[growth stock|growth funds]], which invest in stocks of companies that have the potential for large [[capital gain]]s, and [[value stock|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 [[dividend]]s. [[Income fund]]s 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 [[bond (finance)|bonds]], to stay more conservative when it comes to risk, yet aim for some growth.{{Citation needed|date=November 2007}} |
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====Index funds versus active management==== |
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{{Main|Index fund|active management}} |
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An [[index fund]] maintains investments in companies that are part of major stock (or bond) indexes, such as the [[S&P 500]], while an [[active management|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. |
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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.<ref>{{cite journal | author = Mark Carhart | year = 1997 | month = March | title = On Persistence in Mutual Fund Performance | journal = Journal of Finance | volume = 52 | issue = 1 | pages = 56–82 }}</ref> An analysis of the equity funds returns of the 15 biggest asset management companies worldwide from 2004 to 2009 showed that about 80% of the funds have returned below their respective benchmarks.{{Citation needed|date=August 2010}} Moreover, funds that performed well in the past are not able to beat the market again in the future (shown by Jensen, 1968; Grinblatt and [[Sheridan Titman]], 1989)..<ref>{{cite journal | author = M. Grimblatt and S. Titman | year = 1989 | title = Mutual Fund Performance: an Analysis of Quarterly Portfolio Holdings | journal = Journal of Business | volume = 62 | issue = 3 | pages = 393–416 | doi = 10.1086/296468}}</ref> |
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===Bond funds=== |
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[[Bond fund]]s account for 18% of mutual fund assets.<ref name="Investment Company Institute"/> 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 bond]]s. With the potential for high yield, these bonds also come with greater risk. |
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===Money market funds=== |
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[[Money market fund]]s hold 26% of mutual fund assets in the United States.<ref>{{cite web|url=http://www.ici.org/funds/abt/faqs_money_funds.html |title=Frequently Asked Questions About Money Market Mutual Funds |publisher=Investment Company Institute |accessdate=2006-04-11 |archiveurl = http://web.archive.org/web/20060209094149/http://www.ici.org/funds/abt/faqs_money_funds.html <!-- Bot retrieved archive --> |archivedate = 2006-02-09}}</ref> Money market funds generally entail the least risk, as well as lower rates of return. Unlike [[certificates of deposit]] (CDs), open-end money fund shares are generally liquid and redeemable at "any time" (that is, normal business hours during which redemption requests are taken - generally not after 4 PM ET). Money funds in the US are required to advise investors that a money fund is not a bank deposit, not insured and may lose value. Most money fund strive to maintain an NAV of $1.00 per share though that is not guaranteed; if a fund "breaks the buck", its shares could be redeemed for less than $1.00 per share. While this is rare, it has happened in the U.S., due in part to the mortgage crisis affecting related securities. |
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===Funds of funds=== |
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Funds of funds (FoF) are mutual funds which invest in other mutual funds (i.e., they are funds composed of other funds). The funds at the underlying level are often funds which an investor can invest in individually, though they may be 'institutional' class shares that may not be within reach of an individual shareholder). A fund of funds will typically charge a much lower management fee than that of a fund investing in direct securities because it is considered a fee charged for asset allocation services which is presumably less demanding than active direct securities research and management. The fees charged at the underlying fund level are a real cost or drag on performance but do not pass through the FoF's income statement (statement of operations), but are usually disclosed in the fund's annual report, prospectus, or statement of additional information. FoF's will often have a higher overall/combined expense ratio than that of a regular fund. The FoF should be evaluated on the combination of the fund-level expenses and underlying fund expenses, as these both reduce the return to the investor. |
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Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although some invest in unaffilated funds (those managed by other advisors) or both. The cost associated with investing in an unaffiliated underlying fund may be 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). |
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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. |
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===Hedge funds=== |
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{{Main|Hedge fund}} |
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[[Hedge fund]]s in the United States are pooled investment funds with loose, if any, SEC regulation, unlike mutual funds. Some hedge fund managers are required to register with SEC as [[Registered Investment Advisor|investment advisers]] under the [[Investment Advisers Act of 1940]].<ref>{{cite web|url=http://www.sec.gov/answers/hedge.htm |title=Hedging Your Bets: A Heads Up on Hedge Funds and Funds of Hedge Funds |publisher=U.S. Securities and Exchange Commission (SEC) |accessdate=2006-04-11}}</ref> 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. |
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A variation of the hedge strategy is the [[130-30 funds|130-30 fund]] for individual investors. |
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==Mutual funds vs. other investments== |
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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 account]]s (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.<ref>{{cite news | url=http://online.wsj.com/article/SB123679669243098151.html |title = SMAs beat funds in 2008|work=The Wall Street Times | first=Ian | last=Salisbury | date=2009-03-12}}</ref><ref>{{cite news|url=http://business.timesonline.co.uk/tol/business/markets/article5705526.ece|title = Global stock market losses total $21 trillion|work=Times Online | location=London | first=Susan | last=Thompson | date=2009-02-11 | accessdate=2010-05-19}}</ref> 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]]. |
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===Share classes=== |
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Mutual funds may offer different types of shares, known as ''classes''. For a given fund, each class will invest in the same 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. As a result, each class will likely have different performance results.<ref name="secinfo">{{cite web |url=http://www.sec.gov/investor/pubs/inwsmf.htm Sources of Information |title=Invest Wisely: An Introduction to Mutual Funds |publisher=U.S. Securities and Exchange Commission (SEC)|accessdate=2006-04-11}}</ref> |
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As an example, a fund may have three classes of shares that are sold to the general public – '''Class A''', '''Class B''', and '''Class C''' – and a class that is sold only to institutional investors – '''Class I'''. |
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* '''Class A''' shares often have a [[Front-end load|front-end sales load]] (a type of fee that investors pay when they purchase fund shares). |
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* '''Class B''' shares often have no front-end sales load, instead having a [[Deferred sales charge|contingent deferred sales load]], or CDSL (a type of fee paid when fund shares are sold, and that typically decreases to zero over time) and a [[12b-1]] fee. Class B shares also may convert automatically to a class of shares with a lower 12b-1 fee (usually Class A) if held long enough. |
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* '''Class C''' shares might have a 12b-1 fee and a front-end sales load or CDSL, but these would be lower than a Class A’s front-end sales load or a Class B’s CDSL. Class C shares usually do not convert to another class. <ref>{{cite web|url=http://www.sec.gov/answers/mfclass.htm|title=Mutual Fund Classes|publisher=U. S. Securities and Exchange Commission|accessdate=2010-12-05}}</ref> |
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* '''Class I''' would be sold only to institutional investors and might have different fees and expenses. These generally have very high minimum investment requirements. 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.<ref>{{cite web|url=http://news.morningstar.com/article/article.asp?id=142323| title=Which Is the Right Fund Share Class for You? |author= Christine Benz |publisher=Morningstar (registration required)|accessdate=2006-04-11}}</ref> |
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===Load and expenses=== |
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{{Main|Mutual fund fees and expenses}} |
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A [[front-end load]] or [[sales charge]] is a [[Commission (remuneration)|commission]] paid to a [[Stock broker|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. |
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Load funds are sold through [[Financial intermediary|financial intermediaries]] such as brokers, [[financial planner]]s, 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". |
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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 buyer is therefore paying the fee indirectly through the fund's expenses deducted from profits.) |
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No-load funds include both index funds and actively managed funds. The largest mutual fund families selling no-load index funds are [[The Vanguard Group|Vanguard]] and [[Fidelity Investments|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. |
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Many [[Fee-Only financial advisor|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. |
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== See also == |
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{{div col}} |
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* [[Closed-end fund]] |
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* [[Exchange-traded fund]] |
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* [[Fund derivative]] |
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* [[Global assets under management]] |
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* [[Index fund]] |
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* [[Institutional investor]] |
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* [[Investment Company Institute]] |
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* [[Investment management]] |
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* [[List of mutual fund companies in Canada]] |
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* [[List of mutual-fund families in the United States]] |
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* [[List of US Mutual Funds By Assets Under Management]] |
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* [[Mutual funds in India]] |
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* [[Money fund]] |
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* [[Mutual-fund scandal (2003)]] |
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* [[Open-end fund]] |
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* [[Pension]] |
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* [[Retirement plans in the United States]] |
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* [[Separately managed account]] or SMAs |
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* [[Socially responsible investing]] |
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* [[Superannuation fund]] |
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* [[Unit trust]] |
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* [[Value investing]] |
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* [[Venture capital]] |
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{{div col end}} |
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== References == |
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{{Reflist|2}} |
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==Further reading== |
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<!-- not clear how this is used in the article, please add inline citations if desired --> |
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{{Refbegin}} |
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Sources for additional information on the history and operations of mutual funds: |
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* Robert Pozen and Theresa Hamacher, ''The Fund Industry: How Your Money is Managed'' (Wiley, 2011) |
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* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=960145 Tamar Frankel & Lawrence A. Cunningham, "The Mysterious Ways of Mutual Funds: Market Timing", ''Annual Review of Financial and Banking Law'' (2007)] |
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{{Refend}} |
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==External links== |
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*[http://www2.standardandpoors.com/spf/pdf/equity/MFMethodology.pdf S&P Mutual Fund Methodology] S&P Mutual Fund Methodology |
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{{investment-management}} |
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[[Category:Institutional investors]] |
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[[Category:Collective investment schemes]] |
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[[Category:Mutual funds of the United States| ]] |
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