Mutual Funds Summed Up

Definition of mutual funds

Mutual funds can be said to be an assortment of securities resourcefully managed by the sponsoring management company or Investment Company that issues shares to investors.


This assortment is made through the trade of collecting funds from investors and pooling them for the rationale of building a range of securities according to affirmed objectives.

Who does this?

Mutual funds fit in to a gathering of monetary intermediaries known as investment companies or open-end investment companies. Other members of the group are closed-end investment companies also called closed-end funds and unit investment trusts.

Management of mutual funds

Mutual funds are commonly ordered as companies or trusts, thus have a board of directors or trustees selected by the shareholders or the owners.

Almost all aspect of their functions is apparently controlled. They employ an admin company to direct the investment for a fee, usually based on a percentage of the fund's average net assets throughout the year.

Categories of management

The management company may be an affiliate or joint organization or a self-governing service provider.

How they do it

They trade their shares to investors either directly or indirectly through other firms such as broker-dealers, financial planners, employees of insurance companies, and also banks.

Others can manage as well

Even the every day management of a fund is carried out by an outsider, which may be the running company or an independent third party.

Accountability of the managing company

The management company is accountable for deciding on an investment assortment that is steady with the goals of the fund as stated in its brochure and running the portfolio in the best interest of the shareholders.

The directors of the fund are in charge of general control of the fund; they are expected to generate measures and evaluate the performance of the management Company and employees who perform services for the fund.

Fundamental types of mutual funds

They include the money market, stock or equity, bond, and hybrid. This categorization is based on the type and the prime of life of the securities chosen for investment.

Money market funds invest in as short-term funds or securities that expire in one year or less, such as Treasury bills, commercial paper, and certificates of deposits.

Stock, bond, and hybrid funds invest in long-term funds or securities. Hybrid funds invest in a grouping of stocks, bonds, and other securities.

Mutual funds also differ in terms of their investment objectives

The main investment objectives within the stock funds include capital appreciation, total return, and world equity. There are two clusters of bond funds which consist of taxable bond funds and tax-free bond funds.

Main group in taxable bond funds are corporate bond funds, high-yield funds, world bond funds, government bond funds, and strategic income funds.

The chief tax-free bond fund categories are state municipal bond funds and national municipal bond funds.

Along with money market funds, there are also taxable money market funds and tax-exempt money market funds.

Open-end investment companies-why they are called so

Mutual funds are known as open-end investment companies because they are needed to issue shares and buy back remaining shares upon demand.

Closed-end funds, on the other hand, issue a certain number of shares but do not stand prepared to buy back their own shares from investors. Their shares are traded on the stock exchange or in the over-the-counter market.

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By: Esteri Maina

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An original article by Esteri Maina on MUTUAL FUNDS