If you have studied investment options you have no doubt heard about mutual funds. There is a high probability that you already have mutual funds in your brokerage account or retirement plan. It is calculated that more than 45% of Americans have mutual funds in their portfolio, which is upwards of 92 million people. With the statistics being what they are it is a good idea to have a general idea about this common type of investment market.
The concept behind mutual funds is that it allows several investors to pool their money together in order to hire a portfolio manager. This manager can take this fund of assets and invest it in either stocks or some other form of investment securities, which could be bonds, stocks, securities etc. The manager’s job is to continue managing this account according to the style set up for this particular fund which is usually recorded in a prospectus. The investors in this fund expect the investment strategy to proceed in the manner outlined by the prospectus because it generally outlines a particular level of risk to which they are comfortable investing their money.
All mutual funds require that an operational fee be paid to the managers of the funds. These can be in the form of upfront fees (sales charge/load) or back end load (deferred sales charge) and those that require no sales charge (no-load funds). There is also a “12b-1” fee that some companies impose in order to cover marketing and distribution expenses. The fee structure is also sometimes rated according to class structure, labeled as Class A, Class B, etc.
There are four basic types when it comes to investment markets. They are “Closed-End Funds,” “Open-End Funds,” “Exchange-Traded Funds,” and “Unit Investment Trusts.” Mutual funds are considered open end funds, and continue to be regulated according to the Investment Company Act of 1940.