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Frequently Asked Questions (FAQs) on Mutual Funds
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What is a mutual fund?
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Why do people use mutual funds?
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Are there any disadvantages to using a mutual
fund?
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What is a "closed-end fund" vs. an "open-end
fund"?
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What is "net asset value"?
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A fund is "closed". Is that the same as
a closed-end fund?
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What expenses are there for a mutual fund?
- What is a
mutual fund?
A mutual fund, otherwise known as an investment company, is a corporation
which pools together investor's money generally to purchase stocks and bonds.
Investors participate in the mutual fund by purchasing shares of the entire
pool of assets, thus diversifying their investment. The pooled assets are
invested by professional managers who buy and sell securities on behalf of the
investors. Because mutual funds pass all gains, losses and tax
obligations/benefits through to investors, mutual funds receive preferential
tax treatment under the U.S. Internal Revenue Code.
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Why do people use mutual funds?
Many people purchase mutual funds because they are a convenient and cost
effective method of obtaining diversification and professional management.
Because mutual funds hold anywhere from a few securities to several thousand,
risk is spread out over a number of investments. Additionally, mutual funds
generally buy and sell securities in volume, which allows investors to benefit
from lower trading, management and research costs. Another advantage that
mutual funds offer is that fund performance is subject to frequent reviews by
various publications and rating agencies, making it possible for investors to
conduct direct comparisons between funds.
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Are there any
disadvantages to using a mutual fund?
Although what one person may view as a disadvantage another may see as a
desirable quality, below are some factors which may be disadvantages depending
on your point of view:
(a) All mutual funds charge expenses. Whether they be marketing, management or
brokerage fees fund expenses are generally passed back to the investors.
(b) Investors exercise no control over what securities the fund buys or sells.
(c) The buying and selling of securities within the mutual fund portfolio
generates capital gains and losses which are passed back to investors even if
they have not sold any of their mutual fund shares.
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What is a "closed-end
fund" vs. an "open-end fund"?
A closed-end fund has a fixed number of shares outstanding and is traded just
like other stocks on an exchange or over the counter. The more common open-end
funds sell and redeem shares at any time directly to shareholders. Sales and
redemption prices of open-end funds are fixed by the sponsor based on the
fund's net asset value; closed-end funds may trade a discount (usually) or
premium to net asset value.
- What is
"net asset value"?
The net asset value (NAV) is the value of the fund's underlying securities. It
is calculated at the end of the trading day. Any open-end fund buy or sell
order received on that day is traded based on the net asset value calculated
at the end of the day.
A few funds calculate net asset value at more frequent intervals and process
trades at those values.
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A fund is
"closed". Is that the same as a closed-end fund?
No. Some open-end funds are closed to new investors because the fund manager
feels that it cannot be as effective with a very
large amount of money. This typically happens with funds that invest in small
companies. The open-end format remains the same, but investments are not
accepted from those who do not already have accounts.
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What expenses are there
for a mutual fund?
Closed-end funds charge annual expenses for research and trading
expenses. To buy and sell closed-end fund shares, the investor must usually
pay additional brokerage fees, unless the investor finds someone to buy from
or sell to directly.
Open-end funds charge annual expenses for research and trading
expenses. In addition, they sometimes charge the following:
(a) A front end load or sales charge. These vary from 1% to 8.5% subtracted
from the amount paid and are usually used to pay commissions to brokers and
financial advisors who sell the funds. Very large investors can sometimes get
discounts on the front end loads. Currently, fund sponsors determine loads,
but the SEC is proposing a rule to allow brokers and other salespeople to
discount loads.
(b) A redemption fee, deferred sales charge, or back end load. These work the
same way as front end loads, but are charged when you redeem shares. In many
cases, they decline or disappear after a long enough holding period.
(c) A Rule 12b-1 fee. Used to pay marketing expenses, which means either
commissions or advertising expenses. This is a fee that adds to the annual
expenses; it may be as large as 1.25% per year. Declining back end loads are
common in funds with large 12b-1 fees.
A mutual fund that has neither (a) nor (b) is generally referred to as a
no-load fund. No-load funds are generally not sold through brokers or
financial advisors, but are sold directly to investors. Many advertise in
business and financial periodicals. All of the above expenses for open-end
funds are described on the first or second page of the prospectus in a
standardized form. Brokerage fees paid by the fund in its trading activity are
_not_ normally included in such expense tables as they are usually accounted
for in the cost of securities bought.
More Questions
(FAQs) On
Mutual Funds ==>>
<<== Complete Index of Questions
Related
Articles:
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What are Mutual Funds?
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Advantages of Mutual
Funds
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Disadvantages of
Mutual Funds?
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Different types of Mutual Funds
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More types of Mutual Fund
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How to choose Mutual Funds
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How to buy and sell Mutual Funds
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Tracking your
Mutual Funds
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