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Frequently Asked Questions (FAQs) on Mutual Funds
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How accurate are the mutual fund prices in the newspaper?
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Can mutual funds trade on margin?
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What
are the various forms of mutual fund account registration?
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How are mutual funds structured?
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When should I sell a mutual fund?
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How accurate are the mutual fund prices in the newspaper?
According to the Investment Company Institute (ICI) fund pricing is almost
99.5% accurate. Lipper Analytical Services estimates the number to be closer
to 98.95%.
Mutual funds are required to submit to the NASD a daily pricing of the fund's
NAV.
The NASD then distributes this information to the press and news/quote
services.
Occasionally a fund may err in pricing the securities in the portfolio which
results in
an inaccurate NAV being distributed to the press. Fortunately, even the rare
mispricing
is usually detected and corrected prior to any processing of mutual fund buy
and sell orders.
- Can mutual funds trade on margin?
While some brokerage firm margin policies may allow for an investor to borrow
against their mutual fund positions, mutual funds themselves are
prohibited from trading on margin. Additionally, mutual funds are also
prohibited from selling short to participating in joint trading ventures.
Because funds are prohibited from thee more speculative trading practices,
investors often form limited partnerships and other legal entities to bypass
these rules.
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What are the various forms of mutual fund account registration?
The way in which your mutual fund account is registered is an important
factor in estate planning. The disposition of property or assets after
the death of an individual is often governed by the way that
property or account is titled. Listed below are descriptions
for three common forms of mutual fund account registration.
- Sole Ownership: Individual registration is the simplest form of ownership because
one person has absolute control of the property. Owner must plan for
transfer of the account when he/she dies; commonly done with a will.
Otherwise state rules of succession and state inheritance laws dictate
disposition of account upon death.
- Joint Tenant:
Most common form of ownership involving 2 or more individuals. Each person
owns an individual interest in the entire account. Consequently, income
generated from the account is owned equally by all of the parties involved in
the joint tenancy. Right of survivorship dictates that upon the death of a
joint tenant, the account immediately and automatically passes to the
surviving owner(s). Joint tenants do not have to be related individuals.
- Tenants In Common: Differs from joint tenancy in several ways. Tenants in common each own a
specific portion of the account. If no specific allocation is made
(e.g. two-thirds/one-third or one-half/one-half), the account is said to be
equally divided among all of the tenants. Income earned on the account
is divided based upon the specific allocation of ownership. As in joint
tenancy, tenants in common do not have to be related individuals.
There are no survivorship rights for assets held in tenancy in common. Upon
the death of one of the tenants, the assets will pass to whomever the
decedent names in a will.
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Note:
Community property is a specific form of registration that is only
available in certain states. The following states are community
property states:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington and Wisconsin.
- How are mutual funds structured?
Mutual funds are in their most basic form corporations. Investors
are the shareholders in the company and the assets of the company are
the pooled investments of all the shareholders (investors). The board of
directors of a mutual fund act just as a board of directors for any company.
They are elected representatives of the investors, who owe shareholders
a fiduciary responsibility. The most important function of the board is
to select the fund's manager. The fund manager is in a way, the president
of the company/fund. The manager traditionally makes all the investment
decisions for the fund and supervises the day to day operations.
Managers are paid a management fee which is usually a percentage of
the assets under management. Managers may also have incentive clauses
in their contracts that reward superior performance. Because the manager
is paid a percentage of the assets s/he is responsible for, there is an
incentive
to do well for investors in the hopes of attracting more investors and in
turn, more money to manage.
- When should I sell a mutual fund?
While one could never hope to cover every circumstance that would warrant
the sell of a mutual fund investment (or any investment for that matter),
here are some sound reasons for considering parting with a particular
mutual fund holding.
- The fund's style has changed. If you have invested in a large-cap growth
fund and fund has begun investing in smaller, riskier investments it might
be time to shed this fund. This can also operate conversely. If your
fund's objective is to invest in emerging growth and begins becoming heavy
with large and medium cap stocks, you might want to shift your money into a
fund that more closely fits your investment objective.
- The fund consistently lags behind. A single quarter or year does not a bad
fund make but if your fund has consistently lagged its peers, you may want
to cut this one loose. Also, it's important to keep in mind that you have
to make a fair comparison. Do not compare your utility fund against the
S&P500. Compare it against similar funds with similar objectives. If you
find that your fund has underperformed its peer group over 1, 3 and 5 years
it's probably time to move on.
- Management has changed hands. While this factor alone is not truly
justification for moving your assets, it should send up a red flag for you
to scrutinize performance more closely. Most funds have plenty of able
managers ready to take the helm but you should be diligent in making sure
that your new manager stays competitive with his/her peers.
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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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