Introduction to the mutual fund industry

Why do people buy mutual funds? Mutual funds are a popular choice among investors because they generally offer the following features:

Introduction to the mutual fund industry

You can lose money investing in mutual funds or ETFs. All mutual funds and ETFs have costs that lower your investment returns.

Shop around and compare fees. How Mutual Funds Work A mutual fund is an SEC-registered open-end investment company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments.

The combined securities and assets the mutual fund owns are known as its portfolio, which is managed by an SEC-registered investment adviser.

Mutual fund shares are typically purchased from the fund directly or through investment professionals like brokers. Mutual funds are required by law to price their shares each business day and they typically do so after the major U.

Mutual funds must sell and redeem their shares at the NAV that is calculated after the investor places a purchase or redemption order.

Types of Investment Companies There are three basic types of investment companies: Open-end investment companies or open-end funds—which sell shares on a continuous basis, purchased from, and redeemed by, the fund or through a broker for the fund ; Closed-end investment companies or closed-end funds—which sell a fixed number of shares at one time in an initial public offering that later trade on a secondary market; and Unit Investment Trusts UITs —which make a one-time public offering of only a specific, fixed number of redeemable securities called units and which will terminate and dissolve on a date that is specified at the time the UIT is created.

Mutual funds are open-end funds. How ETFs Work Like mutual funds, ETFs are SEC-registered investment companies that offer investors a way to pool their money in a fund that makes investments in stocks, bonds, other assets or some combination of these investments and, in return, to receive an interest in that investment pool.

Unlike mutual funds, however, ETFs do not sell individual shares directly to, or redeem their individual shares directly from, retail investors.

Introduction to the mutual fund industry

Instead, ETF shares are traded throughout the day on national stock exchanges and at market prices that may or may not be the same as the NAV of the shares.

ETF sponsors enter into contractual relationships with one or more Authorized Participants —financial institutions which are typically large broker-dealers. In addition, they can do so only in large blocks e.

An ETF share is trading at a premium when its market price is higher than the value of its underlying holdings. An ETF share is trading at a discount when its market price is lower than the value of its underlying holdings. A history of the end-of-day premiums and discounts that an ETF experiences—i.

ETPs constitute a diverse class of financial products that seek to provide investors with exposure to financial instruments, financial benchmarks, or investment strategies across a wide range of asset classes. ETP trading occurs on national securities exchanges and other secondary markets, making ETPs widely available to market participants including individual investors.

Exchange-traded commodity funds are structured as trusts or partnerships that physically hold a precious metal or that hold a portfolio of futures or other derivatives contracts on certain commodities or currencies.

ETNs are secured debt obligations of financial institutions that trade on a securities exchange. ETNs are complex, involve many risks for interested investors, and can result in the loss of the entire investment. This brochure discusses only ETFs that are registered as open-end investment companies or unit investment trusts under the Investment Company Act of Whether any particular feature is an advantage or disadvantage for you will depend on your unique circumstances—always be sure that the investment you are considering has the features that are important to you.

Spreading investments across a wide range of companies or industry sectors can help lower risk if a company or sector fails. Many investors find it less expensive to achieve such diversification through ownership of certain mutual funds or certain ETFs than through ownership of individual stocks or bonds.

Similarly, ETF shares can often be purchased on the market for relatively low dollar amounts. Liquidity and Trading Convenience. Mutual fund investors can readily redeem their shares at the next calculated NAV—minus any fees and charges assessed on redemption—on any business day.

Mutual funds must send investors payment for the shares within seven days, but many funds provide payment sooner.

Hedge Fund Services

ETF investors can trade their shares on the market at any time the market is open at the market price—minus any fees and charges incurred at the time of sale. ETF and mutual fund shares traded through a broker are required to settle in two business days. Costs Despite Negative Returns.

Investors in mutual funds must pay sales charges, annual fees, management fees and other expenses, regardless of how the mutual fund performs. Investors may also have to pay taxes on any capital gains distribution they receive. Investors in ETFs must pay brokerage commissions, annual fees, management fees and other expenses, regardless of how the ETF performs.

Federal Government Bond Funds

ETF investors may also have to pay taxes on any capital gains distributions; however, because of the structure of certain ETFs that redeem proceeds in kind, taxes on ETF investments have historically been lower than those for mutual fund investments. It is important to note that the tax efficiency of ETFs is not relevant if an investor holds the mutual fund or ETF investment in a tax-advantaged account, such as an IRA or a k.

With an individual stock or an ETF, an investor can obtain real-time or close to real-time pricing information with relative ease by checking financial websites or by calling a broker. Determine your financial goals and risk tolerance.

When it comes to investing in mutual funds and ETFs, investors have thousands of choices. Before you invest in any mutual fund or ETF, you must decide whether the investment strategy and risks are a good fit for you.The herd instinct kicks into overdrive when mutual fund investors hear the word "recession" and news reports show stock prices dropping.

Fears of further declines and mounting losses chase. Mutual fund fees and expenses are charges that may be incurred by investors who hold mutual lausannecongress2018.comg a mutual fund involves costs, including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses.

Funds pass along these costs to . How ETFs Work. Like mutual funds, ETFs are SEC-registered investment companies that offer investors a way to pool their money in a fund that makes investments in stocks, bonds, other assets or some combination of these investments and, in return, to receive an interest in that investment pool.

The introduction of money market funds in the high interest rate environment of the late s boosted industry growth dramatically. The first retail index fund, In , the mutual fund industry was involved in a scandal involving unequal treatment of .

A Purely American Invention: The U.S. Open-End Mutual Fund Industry targets the needs of three audiences. First, it seeks to help mutual fund industry employees who wish to gain an understanding of both the breadth of fund operations and the context in which they are performed.

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