Mutual Fund Investing

Details

Category: Investment Type

A mutual fund is a professionally-managed type of collective Investing scheme that pools money from many investors to buy securities (stocks, bonds, short-term money market instruments, and/or other securities). A mutual fund has a fund manager that trades (buys and sells) the fund's investing in accordance with the fund's Investing objective. Mutual funds may invest in many kinds of securities (subject to its Investing objective as set forth in the fund's 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, stocks, bonds, other mutual fund shares and more exotic instruments such as derivatives like forwards, futures, options and swaps. Some funds' Investing objectives (and or its name) define the type of Investing in which the fund invests.

Most mutual funds' Investing portfolios are continually monitored by one or more employees within the sponsoring Investing adviser or management company, typically called a portfolio manager and their assistants, who invest the fund’s assets in accordance with its Investing objective and trade securities in relation to any net inflows or outflows of investor capital (if applicable), as well as the ongoing performance of Investing appropriate for the fund. A mutual fund is advised by the Investing adviser under an advisory contract which generally is subject to renewal annually. 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. All expenses are expressed as a percentage of the average daily net assets of the fund.

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.