A mutual fund is a professionally managed investment fund that raises money from many investors to buy securities. These investors may be retail or institutional.
Mutual funds have advantages and disadvantages compared to direct investments in individual securities. The main advantage of mutual funds is that they provide economies of scale, higher levels of diversification, they provide liquidity, and they are managed by professional investors. On the negative side, investors in mutual funds have to pay various expenses and expenses.
The main structures of mutual funds include open-end funds, investment trust units, and closed funds. Exchange-traded funds (ETFs) are open-end funds or investment trust units that trade on the exchange. Mutual funds are also classified by their main investments as money market funds, bonds or fixed income funds, equities or equity funds, hybrid funds or otherwise. Funds can also be categorized as index funds, which are managed passively funds that match the performance of the index, or funds that are managed actively. Hedge funds are not mutual funds; hedge funds can not be sold to the general public and are subject to different government regulations.
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Histori
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The first modern investment fund (the forerunner of today's mutual funds) was established in the Republic of the Netherlands. In response to the financial crisis of 1772-1773, Amsterdam-based businessman Abraham (or Adriaan) van Ketwich formed a belief called Eendragt Maakt Magt ("unity creates power"). The goal is to provide opportunities for small investors to diversify.
Mutual funds were introduced to the United States in the 1890s. Early US funds are generally closed-end funds with fixed-amount shares that are often traded at prices above the net asset value of the portfolio. The first open-end mutual fund with exchangeable shares was established on March 21, 1924 as the Massachusetts Investors Trust. (It still exists today and is now managed by MFS Investment Management.)
In the United States, closed funds remain more popular than open-end funds during the 1920s. In 1929, open-end funds accounted for only 5% of the industry's total assets of $ 27 billion.
After Wall Street Crash of 1929, the US Congress issued a series of measures governing the securities market in general and mutual funds in particular.
- The Securities Act of 1933 requires all investments sold to the public, including mutual funds, to be registered with the SEC and that they provide potential investors with prospectuses disclosing important facts about investments.
- The Securities and Exchange Act of 1934 requires that securities issuers, including mutual funds, report regularly to their investors; this action also creates the Securities and Exchange Commission, which is the main regulator of mutual funds.
- The Revenue Act of 1936 establishes guidelines for the taxation of mutual funds.
- The Investment Companies Act of 1940 establishes rules that specifically regulate mutual funds.
This new law encourages the development of open mutual funds (as opposed to closed funds).
The growth of the US mutual fund industry remained limited until the 1950s, when confidence in the stock market returned. In 1970, there were about 360 funds with assets of $ 48 billion.
The introduction of money market funds in a high interest rate environment in the late 1970s led to dramatic industrial growth. The first retail index fund, the First Index Investment Trust, was formed in 1976 by The Vanguard Group, led by John Bogle; now called "Vanguard 500 Index Fund" and is one of the largest mutual funds in the world. The growth of the funds industry continued into the 1980s and 1990s.
According to Pozen and Hamacher, growth is the result of three factors:
- The bullish market for stocks and bonds,
- Introduction of new products (including funds based on municipal bonds, various industry sectors, international funds, and target date funds) and
- Distribution of wider fund shares, including through employee-directed pension accounts such as 401 (k) and other defined contribution plans and individual retirement accounts (IRA.) Among the new distribution channels is a pension plan. Mutual funds are now a preferred investment option in certain types of rapidly growing pension packages, particularly in the 401 (k) and other defined contribution plans and in individual retirement accounts (IRAs), all of which soared in popularity in the 1980s. li>
In 2003, the mutual fund industry was involved in a scandal involving unfair treatment of fund shareholders. Some fund management firms allow investors to be favored to engage in illegal, final, or market time trading, which is a practice that is prohibited by fund policies. The scandal was originally discovered by former New York Attorney General Eliot Spitzer and led to a significant increase in regulation.
Total assets of mutual funds fell in 2008 as a result of the financial crisis of 2007-2008.
Today's mutual fund
By the end of 2016, mutual fund assets worldwide reach $ 40.4 trillion, according to the Institute of Investment Companies. The countries with the largest mutual funds industry are:
- United States: $ 18.9 trillion
- Luxembourg: $ 3.9 trillion
- Ireland: $ 2.2 trillion
- Germany: $ 1.9 trillion
- French: $ 1.9 trillion
- Australia: $ 1.6 trillion
- United Kingdom: $ 1.5 trillion
- Japan: $ 1.5 trillion
- China: $ 1.3 trillion
- Brazil: $ 1.1 trillion
In the United States, mutual funds play an important role in US household finances. By the end of 2016, 22% of household financial assets are held in mutual funds. Their role in pension savings is even more significant, as mutual funds account for about half of the assets in individual pension accounts, 401 (k) and other similar pension plans. In total, mutual funds are big investors in stocks and bonds.
Luxembourg and Ireland are major jurisdictions for UCITS fund registration. These funds can be sold throughout the EU and in other countries that have adopted a joint recognition regime.
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Profits and losses for investors
Mutual funds have advantages and disadvantages compared to direct investments in individual securities:
Benefits
- Increased diversification: A diversified fund holds many securities; This diversification reduces risk.
- Daily Liquidity: Shareholders from open-end funds and unit investment trusts can sell their holdings back to the fund periodically at prices equal to the net asset value of the ownership of the funds. Most funds allow investors to trade in this way at the close of each trading day.
- Professional investment management: Open-and closed-end funds employ portfolio managers to oversee fund investments.
- The ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in overseas markets.
- Services and convenience: Funds often provide services such as check writing.
- Government monitoring: Mutual funds are regulated by government agencies
- Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier than
Losses
Mutual funds have losses as well, which include:
- Cost
- Less control of profit recognition time
- Unpredictable earnings
- No chance to adjust
Settings and operations
United States
In the United States, the main laws governing mutual funds are:
- The Securities Act of 1933 requires that all publicly traded investments, including mutual funds, be registered with the SEC and that they provide potential investors with prospectuses disclosing important facts about investments.
- The Securities and Exchange Act of 1934 requires that securities issuers, including mutual funds, report regularly to their investors; this action also creates the Securities and Exchange Commission, which is the main regulator of mutual funds.
- The Revenue Act of 1936 establishes guidelines for the taxation of mutual funds. Mutual funds are not taxed on their income and profits if they comply with certain conditions under the U.S. Internal Revenue Code; on the other hand, taxable income is forwarded to investors in the fund. Funds are required by the IRS to diversify their investments, limit the ownership of ballot papers, distribute most of their income (dividends, interest and net capital gain from losses) to their investors every year, and earn the most revenue by investing in securities and currencies. Characterization of fund revenues does not change when paid to shareholders. For example, when mutual funds distribute dividend income to their shareholders, fund investors will report the distribution as dividend income on their tax returns. As a result, mutual funds are often called "pass-through" vehicles, as they only pass on the related tax revenues and liabilities to their investors.
- The Investment Company Act of 1940 establishes rules that specifically regulate mutual funds. The focus of this Act is on disclosure to public investment information about its funds and investment objectives, as well as on the structure and operation of investment companies.
- The Investment Advisory Act of 1940 establishes rules governing investment advisers. With certain exceptions, the Act requires a single company or practitioner to compensate for advising others about securities investments should register with the SEC and adapt to regulations designed to protect investors.
- The National Securities Market Enhancement Act of 1996 provides the ruling power to the federal government, ahead of state regulators. However, countries continue to have the authority to investigate and prosecute fraud involving mutual funds.
Open-end and closed-end funds are overseen by the board of directors, if managed as a company, or by the supervisory board, if managed as trust. The board must ensure that funds are managed for the benefit of investors' funds. The Council employs fund managers and other service providers for the funds. The sponsors of the funds trade (buy and sell) the investment of funds in accordance with the investment objectives of the fund. Funds managed by the same company with the same brand are known as family funds or complex funds.
The sponsor or fund management company, often referred to as the fund manager, trades (buys and sells) the funds' investments in accordance with the investment objectives of the fund. The investment manager should be a registered investment advisor. Funds managed by the same company with the same brand are known as family funds or complex funds.
European Union
In the EU, funds are governed by laws and regulations set by their home country. However, the EU has established a joint recognition regime that allows funds to be regulated in one country for sale in all other countries in the EU, but only if they meet certain requirements. The directive establishing this regime is the Implementation of Collective Investment in the Direction of Transferable Directive 2009, and the funds in accordance with its terms are known as UCITS funds.
Canada
Rule of mutual funds in Canada is mainly regulated by National Instrument 81-102 "Mutual Funds." NI 81-102 is implemented separately in each province or region. The Canadian Securities Administrator works to align Canada's rules.
Hong Kong
in the Hong Kong market: mutual funds are regulated by two authorities.
- The Securities and Futures Commission (SFC) is developing regulations that apply to all mutual funds marketed in Hong Kong.
- The Obligatory Authority Fund Authority Regulation (MPFA) applies only to mutual funds marketed for use in Hong Kong pension accounts. MPFA rules are generally more stringent than SFC rules.
Taiwan
In Taiwan, mutual funds are regulated by the Financial Supervisory Commission (FSC).
Fund structure
There are three main structures of mutual funds: open-end funds, unit investment trusts, and closed funds. Exchange-traded funds (ETFs) are open-end funds or investment trust units that trade on the exchange.
Open-end funds
Open-end mutual funds must be willing to buy back ("redeem") their shares from their investors on net asset value (NAV) calculated that day based on the price of the securities owned by the fund. In the United States, open-end funds should be willing to repurchase shares at the end of each business day. In other jurisdictions, open funds may only be required to repurchase shares at longer intervals. For example, UCITS funds in Europe are only required to receive redemptions twice each month (although most UCITS accept daily redemptions).
Most open-end funds also sell shares to the public on a daily basis; These shares are priced at NAV.
Most mutual funds are open-end funds. In the United States by the end of 2016, there are 8,066 open mutual funds with combined assets of $ 16.3 trillion, accounting for 86% of the US industry.
Closed funds
Closed funds usually only issue shares to the public only once, when they are made through an initial public offering. Their shares are then listed for trading on the stock exchange. Investors who want to sell their shares must sell their shares to other investors in the market; they can not sell their shares back to the funds. The prices that investors receive for their stocks may differ significantly from NAVs; it may be on "premium" for NAV (ie, higher than NAV) or, more commonly, at "discount" to NAV (ie, lower than NAV).
In the United States by the end of 2016, there are 530 closed mutual funds with a combined asset of $ 300 billion, accounting for 1% of the US industry.
Trust investment unit
The confidence of the investment unit (UIT) is issued to the public only once, when they are created. UITs generally have a limited life span, established at the time of creation. Investors can redeem shares directly with funds at any time (similar to open-end funds) or wait to redeem them after the cessation of that trust. Less commonly, they can sell their shares on the open market.
Unlike other types of mutual funds, the investment trust unit does not have a professional investment manager. Their securities portfolio was established on the creation of UIT.
In the United States by the end of 2016, there are 5,103 UITs with combined assets of less than $ 0.1 trillion.
Exchange-traded funds
Exchange-traded funds (ETFs) are structured as open-end investment firms or UITs. The ETF combines the characteristics of both closed funds and open-end funds. ETFs are traded all day in the stock market. The arbitration mechanism is used to keep the trade price close to the net asset value of ETF holdings.
In the United States by the end of 2016, there are 1,716 ETFs in the United States with a combined asset of $ 2.5 trillion, accounting for 13% of the US industry.
Classification of funds by type of underlying investment
Mutual funds are usually classified by their main investments, as described in the prospectus and investment objectives. The four main categories of funds are money market funds, bonds or fixed income funds, equity shares or funds, and hybrid funds. In this category, funds can be subclassified by investment objectives, investment approach or specific focus.
The types of securities that may be invested by certain funds are set out in the fund prospectus, legal documents that explain the purpose of investment funds, investment and investment approaches are permitted. The investment objective describes the type of income that the fund is looking for. For example, capital appreciation funds are generally seen to derive most of their profits from rising prices on their securities, not from dividends or interest income. The investment approach describes the criteria used by the fund manager to choose the investment for the fund.
Bond, share, and hybrid funds can be classified as index funds (or managed passively) or actively managed funds.
Money market funds
Money market funds invest in money market instruments, which are fixed income effects with very short time to maturity and high credit quality. Investors often use money market funds in lieu of bank savings accounts, although money market funds are not insured by the government, unlike bank savings accounts.
In the United States, money market funds sold to retail investors and those who invest in government securities can maintain a stable net asset value of $ 1 per share, when they comply with certain conditions. (Other money market funds should calculate the net asset value based on the value of the securities held in the fund.)
In the United States by the end of 2016, assets in money market funds are $ 2.7 trillion, representing 14% of the industry.
Bond funds
Bond funds invest in fixed income or debt securities. Bond funds may be sub-classified according to:
- Certain types of bonds held (such as high-yield bonds or junk, corporate-level investment bonds, government bonds or municipal bonds)
- The maturity of a bond owned (ie, short, medium, or long)
- Bond issuing countries (such as US, emerging markets, or global)
- Tax treatment on accrued interest (tax exempt or tax-exempt)
In the United States by the end of 2016, assets in bond funds are $ 4.1 trillion, representing 22% of the industry.
Stock funds
Stock, or equity, funds are invested in ordinary shares. Stock funds can focus on specific areas of the stock market, such as
- Shares from only certain industries
- Shares from a particular country or territory
- Company shares that experienced strong growth
- Shares deemed by the portfolio manager as good values ​​ relative to the business value of the company
- Shares that pay high dividends that provide revenue
- Shares in a certain market capitalization range
In the United States by the end of 2016, assets in Shares funds are $ 10.6 trillion, representing 56% of the industry.
Hybrid funds
Hybrid funds invest in both bonds and stocks or in convertible securities. Balanced funds, asset allocation funds, target dates or target risk funds, and lifecycle or lifestyle funds are all types of hybrid funds.
Hybrid funds can be structured as funds, meaning that they invest by buying shares in other mutual funds that invest in securities. Many funds are invested in affiliate funds (which means mutual funds managed by the same fund sponsors), although some invest in unaffiliated funds (that is, managed by other fund sponsors) or some combination of the two.
In the United States by the end of 2016, assets in hybrid funds are $ 1.4 trillion, representing 7% of the industry.
Other funds
Funds can invest in commodities or other investments.
Cost
Investors in mutual funds pay the expenses. A portion of this expense reduces the value of the investor account; others are paid by the fund and reduce the net asset value.
This expenditure is divided into five categories:
Cost management
Management fees are paid by the fund to a management company or sponsor that manages funds, provides portfolio management or investment advisory services and usually lends its brand to the fund. Fund managers can also provide other administrative services. Cost management often has a breakpoint, which means that it decreases as an asset (either in certain funds or in the family fund as a whole) increases. The fund board reviews the cost of management annually. The shareholder of the fund must vote on any proposed increase, but the fund manager or sponsors may agree to release some or all of the management costs to lower the cost of funds ratio.
Index funds generally charge a lower management fee than actively managed funds.
Cost of distribution
Distribution fees pay marketing, distribution of stock funds as well as services to investors. There are three types of distribution costs.
- Front-end expenses or sales charges. Front-end expenses or sales fees are commissions paid to brokers by mutual funds when shares are purchased. This is expressed as a percentage of the total amount invested or "the price of a public offering", which is equal to the value of the net asset plus the front-end cost per share. Front-end loads often decrease as the amount invested increases, through a breakpoint. Front-end expenses are paid by investors; it is deducted from the amount invested.
- Back-end loading. Some funds have a back-end load, which is paid by the investor when the stock is redeemed. If the back-end burden decreases the longer the investor holds the stock, it's called the contingent deferred sales cost (CDSC). Like a front-end load, the back-end load is paid for by the investor; it is deducted from the redemption result.
- Distribution and service fees. Some funds charge an annual fee to compensate distributors of share funds to provide ongoing services to fund shareholders. In the United States, this fee is sometimes called cost 12b-1, after the SEC rules authorize it. Distribution and service fees are paid by the funds and reduce the net asset value.
Distribution fees generally vary for each class of stock.
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Mutual funds pay fees related to the purchase or sale of securities in the portfolio. These expenses may include broker commissions. These costs are usually positively correlated with the rotation.
Shareholders may be required to pay fees for certain transactions, such as buying or selling shares of the funds. For example, funds may charge a flat fee to retain an individual pension account for an investor. Some funds charge redemption fees when an investor sells a stock of funds immediately after buying them (usually defined as within 30, 60 or 90 days of purchase); redemption fee is calculated as a percentage of total sales. Shareholder transaction costs are not part of the cost ratio.
Cost of funding services
Mutual funds may pay for other services including:
- Cost and expense of the board of directors or guardians
- Custody fee: payable to custodian bank to keep portfolio of funds in storage and collect income owed on securities
- Administration of funds: to oversee all administrative matters such as preparing financial statements and shareholder reports, SEC filing, compliance monitoring, calculating total returns and other performance information, preparing/filing tax returns and all maintenance fees for compliance against the blue sky of the legal state
- Cost of financial accounting: to invest or service securities accounting and calculate net asset value (usually every New York Stock Exchange is opened)
- Professional service fees: legal and audit fees
- Registration fee: paid to SEC and state securities regulator
- Shareholder communication costs: printing and submitting required documents to shareholders such as shareholder and prospectus reports
- Transfer agent service fees and expenses: to keep a record of shareholders, provide statements and tax forms to investors and provide telephone, internet and or other investor support and services
- Other fees/others
Fund managers or sponsors may agree to subsidize some of these fees.
Expenditure ratio
The cost ratio is equal to the recurring costs and expenses charged to funds over the year divided by the average net assets. Management fees and cost of service fees are usually included in the cost ratio; front-end and back-end loads, securities transaction costs and shareholder transaction costs are typically excluded.
To facilitate cost comparisons, regulators generally require funds to use the same formula to calculate the cost ratio and publish the results.
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In the United States, funds that call themselves "unencumbered" can not charge front-end loads or back-end expenses under any circumstances and can not charge distribution and service fees greater than 0.25% of the fund's assets
Controversy regarding costs and expenses
Critics of the fund industry argue that the cost of funds is too high. They believe that the market for mutual funds is not competitive and there are many hidden costs, making it difficult for investors to reduce the fees they pay. They argue that the most effective way for investors to increase the returns they earn from mutual funds is to invest in low cost cost funds.
The investment manager insists that the cost is determined by a highly competitive market and, therefore, reflects the value that the investor provides for the services provided. They also noted that costs are clearly disclosed.
Definition of key terms
Average annual total return
Mutual funds in the United States are required to report average annual average rate of return for a period of one, five and ten years using the following formula:
P (1 T) n = ERV
Where:
P = hypothetical initial payment of $ 1,000
T = average annual total return
n = number of years
ERV = terminates the redeemable value of a hypothetical $ 1,000 payment made at the beginning of a period of one, five, or ten years at the end of a period of one, five, or ten years (or fractions)
Market capitalization
Market capitalization equals the number of shares of an outstanding company multiplied by the stock market price. Market capitalization is an indication of firm size. The general range of market capitalization is:
- Mega cap - a company worth $ 200 billion or more
- Big/big hat - companies worth between $ 10 billion and $ 200 billion
- Middle cap - a company worth between $ 2 billion and $ 10 billion
- Small hat - a company worth between $ 300 million and $ 2 billion
- Micro hat - a company worth between $ 50 million and $ 300 million
- Close Nano - a company worth less than $ 50 million
Net asset value
The net asset value (NAV) of the fund is equal to the current market value of the ownership of the fund less the liability of the fund. (This figure can also be called a "net asset" of funds). Usually expressed as the number of per-share, calculated by dividing net assets by the number of shares in circulating funds. Funds must calculate the net asset value in accordance with the rules set out in their prospectus; most count their NAVs at the end of each working day.
Assessing securities stored in a portfolio of funds is often the most difficult part of calculating net asset value. Fund boards typically oversee security assessments.
Single mutual funds can give investors a choice of different combinations of front-end loads, back-end loads and distribution and service costs, by offering several different types of stocks, known as stock classes. All of them invest in the same securities portfolio, but each has different costs and, therefore, different net asset values ​​and different performance results. Some of these stock classes may only be available for certain types of investors.
Typical stock classes for funds sold through brokers or other intermediaries in the United States are:
- Class A typically charges front-end sales costs along with a small distribution and service fee.
- Class B typically has no front-end sales burden; Instead, they have high contingent tough sales costs (CDSC) that gradually decrease over the next few years, combined with a high 12b-1 cost. Class B Shares usually convert automatically into Class A shares after they are held for a certain period of time. Classified
- Class C shares usually have a high distribution and service charge and a moderate contingent deferred sales cost that terminated after one or two years. Class C shares are not usually converted to other classes. They are often referred to as "level loads".
- Class I is usually subject to very high minimum investment requirements and is therefore known as an "institutional" stock. They are stocks without load.
- Class R is typically used in retirement plans such as 401 (k) plans. They usually do not charge a fee, but charge a small distribution fee and service fee.
Unencumbered funds in the United States often have two classes of stock:
- Class I shares do not charge distribution and service charges
- Class N shares charge distribution and service charges of no more than 0.25% of the assets of the fund
Both classes of stock usually charge front-end or back-end loads
Turnover
Turnover is a measure of the trading volume of a fund's securities. This is expressed as a percentage of the average market value of the portfolio long-term securities. Turnover is lower than the purchase or sale of funds during a given year divided by the average market value of long-term securities for the same period. If the period is less than one year, turnover is generally annualized.
See also
References
Further reading
-
Fund Industry: How Your Money Is Managed (2nd ed.). Hoboken, NJ: Wiley Finance. ISBN: 978-1118929940. - Thomas P. Lemke; Gerald T. Lins; A. Thomas Smith (2017). Investment Company Regulations . Matthew Bender. ISBN 978-0-8205-2005-6.
- Thomas P. Lemke; Gerald T. Lins; W. John McGuire (2017). Exchange-traded Fund Rules . Matthew Bender. ISBN 978-0-7698-9131-6.
External links
- US. Securities and Exchange Commission, Mutual Funds and ETFs: Guide for Investors
Source of the article : Wikipedia
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