A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. While there is no legal definition of the term “mutual fund”, it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as “investment companies” or “registered investment companies”.
In the united states, mutual funds must be registered with the U.S. Securities and Exchange Commission overseen by a board of directors or board of trustees, and managed by a Registered Investment Advisor. Mutual funds are subject to an extensive and detailed regulatory regime set forth in Investment Company Act of 1940. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code.
There are three types of U.S. mutual funds: open-end funds, unit investment trusts, and closed-end funds. The most common type, open-end funds, must be willing to buy back shares from investors every business day. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Non-exchange-traded open-end funds are most common, but ETFs have been gaining in popularity.
Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds. Funds may also be categorized as index (or passively managed) or actively managed.
The mutual fund also has advantages and disadvantages
Mutual funds have advantages over investing directly in individual securities:
1.Increased diversification: A fund normally holds many securities; diversification decreases risk.
2.Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at the close of every trading day at a price equal to the closing net asset value of the fund’s holdings.
3.Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund’s investments.
4.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 foreign markets.
5.Service and convenience: Funds often provide services such as check writing.
6.Government oversight: Mutual funds are regulated by the SEC
7.Ease of comparison: All mutual funds are required to report the same information to investors, which makes them easy to compare.
Mutual funds have disadvantages as well, which include:
2.Less control over timing of recognition of gains
3.Less predictable income
4.No opportunity to customize