The Features of a Mutual Fund

Mutual funds are financial intermediaries that pool financial resources from individuals, companies and institutions and use the collective resources to invest in diversified portfolios of assets. Mutual funds are professionally managed, with a fund manager that trades the assets and liabilities in the portfolio. In the United States, most mutual funds operate under guidelines of the Investment Company Act of 1940.

  1. Investment Objective

    • A principle feature of any mutual fund is the investment objective. Mutual funds can be incredibly diverse and cater to any number of diverse investors. Some mutual funds may be diversified general funds -- investing in a portfolio of growth stocks, value stocks, bonds, cash and other securities. Other mutual funds may specialize in a certain asset class, such as bond funds primarily holding debenture securities, or even sector funds, which would choose investments only from one market sector, such as technology.

    Costs

    • A second key feature of mutual funds are the prices or fees they charge investors for the services provided. Mutual funds typically charge two types of fees: sales loads and fund operating charges. Sales loads are fees investors pay to enter (front-end load) or to exit (back-end load) a mutual fund. Operating charges are fees investors pay to cover all expenses of the fund, such as transaction costs and the cost of professional management. These fees include 12b-1 fees, which relate to the fund's marketing and distribution costs.

    Management

    • Another key feature of mutual funds is the style of management. Management of mutual funds may be either passive or active. Passive management funds are referred to as index funds. These funds try to replicate the performance of common index, such as the S&P 500. Actively managed funds involve the professional fund managers using a variety of investment techniques to try to outperform the index. Fees of actively managed funds are generally significantly higher than those of passively managed funds.

    Investment Minimums

    • Many mutual funds have minimum required investments a new investor to the fund must make before the investor is admitted. These minimums may be from several hundred to tens of thousands of dollars, depending on the fund. Many funds levy these minimums because of the administrative cost of admitting new investors -- the fees generated from small investments may not cover the administrative costs of admitting them. In addition, and for the same reason, some funds may charge minimums for each additional investment in the fund, although these minimums tend to be significantly less than for the initial investment.

    Open- versus Closed-End Funds

    • A final key feature of mutual funds involves the way the funds are traded. Closed-end funds issue a fixed number of shares to investors. Shares in these funds are often traded on stock exchanges. Open-end funds have no predefined number of shares available. Shares are purchased and sold directly with the fund administrators, and the value of transactions are based on the market net asset value of the fund portfolio's assets and liabilities.

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