A mutual fund is an investment vehicle in which a pool of investors collectively put forward funds to an investment manager to make investments on their behalf. The fund is regulated by the Securities Exchange Commission, or SEC. When involved with a mutual fund, each investor benefits proportionally to the amount of money they invested. Mutual funds may invest in stocks, bonds, money market instruments, or other assets. The advantages of mutual funds are the ability to diversify a portfolio across industries, low fees, and availability of professional expertise in the guise of fund managers. The disadvantages of mutual funds are that they do not provide ownership of underlying holdings to investors; hence, investors do not have much say on the composition and constituents of mutual funds. Have questions about Mutual Funds? Click here. Mutual funds can be a good opportunity for small or individual investors to benefit from a professionally managed investment portfolio. They usually invest in a large number of securities, and their performance is tracked as the change in the market cap of the fund, which itself is determined by the performance of the underlying investments. Mutual funds charge a sales commission, known as load, as well as management fees related to the fund’s administration. While all funds charge management or administration fees, there are funds in the market that are no-load, meaning they do not charge a sales commission. The returns of a mutual fund are based on the performance of its constituents. Therefore, skill and expertise is required to pick equities that provide desired returns. Highly-trained professionals function as fund managers for mutual funds. You can use fund rankings issued by research firms like Morningstar and Standard & Poor to select funds. Buying shares of a mutual fund does not give investors voting rights in a company; instead the fund manager votes on their behalf. However, since mutual funds generally incorporate hundreds of different securities, it does give investors the benefit of diversification of their portfolios. The value of a share of mutual fund is called the net asset value per share, or the NAV. The price is determined by taking the net value of all the securities in the fund and dividing by the outstanding shares. Mutual funds can be open-ended or closed-ended. An open-ended mutual fund issues an unlimited number of shares in the open market and redeems them at market value from investors. The share price of an open-end fund is based on the net asset value of its constituents. Closed-end mutual funds function in the opposite manner i.e., they issue a fixed number of shares and redemption is not allowed. Instead, the only way for an investor to “redeem” a share is by selling it to someone else. Therefore, their price is based on the dynamics of supply and demand and they always trade at a discount to the net asset value of their constituents. Broadly there are four types of mutual funds. They are as follows: The tax implications of mutual funds depend on the investment vehicle used to conduct the transactions. If mutual funds are traded from inside a retirement account, then capital gains accruing from the sale are deferred. If, however, the trades occur outside a retirement account, then the investor is responsible for paying the prevailing capital gains tax. Dividends from the mutual fund or redemption of units contained within the fund are also taxed at regular rates for income and capital gains. The benefits of mutual funds are as follows: The drawbacks of mutual funds are as follows:
Depending on the vehicle of investment and redemption patterns, mutual fund investment can offer tax benefits.
Mutual funds are also more expensive and riskier as compared to index funds.Basics of Mutual Funds
Types of Mutual Funds
Tax Implications of Mutual Funds
Pros and Cons of Mutual Funds
Mutual Fund FAQs
A mutual fund is an investment vehicle in which a pool of investors collectively put forward funds to an investment manager to make investments on their behalf. The fund is regulated by the Securities Exchange Commission, or SEC. When involved with a mutual fund, each investor benefits proportionally to the amount of money they invested.
The four types of mutual funds are: equity mutual funds, money market mutual funds, bond funds, and balanced funds.
The advantages of mutual funds are the ability to diversify a portfolio across industries, low fees, and availability of professional expertise in the guise of fund managers. The disadvantages of mutual funds are that they do not provide ownership of underlying holdings to investors; hence, investors do not have much say on the composition and constituents of mutual funds. Mutual funds are also more expensive and riskier as compared to index funds.
If mutual funds are traded from inside a retirement account, then capital gains accruing from the sale are deferred. If, however, the trades occur outside a retirement account, then the investor is responsible for paying the prevailing capital gains tax.
Buying shares of a mutual fund does not give investors voting rights in a company; instead the fund manager votes on their behalf.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
