Mutual Funds

Financial Dictionary -> Investing -> Mutual Funds

Mutual funds are among the most preferred investment instruments. For middle income individuals, investing in mutual funds yields higher interest and comes with good principal amount at the end of the maturity period of the mutual fund investment. Another important fact is that mutual funds are safe, with close to zero risk, offering an optimized return on earnings and protecting the interest of investors. It is important to gain good understanding of mutual fund investments, companies in the field, and mutual fund experts, as customers are easily misguided by the advertisements and offers promoted by various financial institutions.

As a professionally managed type of investment mechanism, the mutual fund works by pooling money from many individuals, investing in a diverse portfolio of securities such as short-term money market instruments, bonds, stocks, and other financial instruments and commodities, for instance, precious metals. The mutual fund is run by a fund manager who is responsible for the buying and selling of investments in accord with the investment objectives of the fund. In the United States, funds registered with the Securities and Exchange Commission, under the regulations of IRS and SEC, should distribute almost all of their net realized gains and net income from the sale of securities and no less than once a year. In USA, most funds are organized in the form of trusts and overseen by trustees or boards of directors. These are charged with the management of the fund, as to serve in the best interest of investors.

Mutual funds also invest in more exotic financial instruments such as futures, options, forwards, and swaps. In addition, some mutual funds invest mainly in shares in some market sector or industry such as financial services, utilities, or technologies. These are referred to as sector or specialty funds. Bond funds come in different types and vary according to risk (for example, investment-grade corporate bonds and high-yield junk bonds), by maturity, as bonds are short- and long-term, and by type of issuing institution, which may be a corporation, a government agency, or a municipality. Bond and stock funds invest mainly in domestic funds, such as US securities, global funds have both, domestic and foreign securities, and international funds focus on foreign securities.

Management fees are associated with the investment advisory fee that is charged for the fund's operations. At the same time, many entities include their administrative fees when calculating the advisory fee component. The latter may be structured in the form of flat rate fees that are payable regardless of the fund's asset size. Another way in which funds make their advisory fees competitive is by structuring them on the basis of the total value of assets belonging to a complex or a group of funds rather than those of just one fund.

There are few excellent mutual fund companies in the United States, performing well on the market for many years. For instance, the New York Life Insurance Mutual was established in 1845 and offers a large variety of services, including 401(k) products. The company pays dividends to all policy holders on a regular basis, and its shares are not publicly traded like those of other mutual fund companies. This fact boosts the confidence of investors in the trustworthiness of New York Life Insurance Mutual.