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MUTUAL FUNDS

What is a mutual fund and how does it differ from other investments?

A mutual fund is an investment company -- A company that makes investments on behalf of individuals who share common financial goals. The sole business of a mutual fund is the investing and reinvesting of its shareholder's money.

Where does this money come from?
In that most mutual funds are corporations, with a corporate charter granted by a state just like any other corporation, the mutual fund corporations raises equity capital through the sale of common stock to investors.

How does a mutual fund differ from other corporations?
Other corporations sell stock to raise equity capital and take the money raised through the sale of stock to build a business. They use that money to purchase equipment, build factories, hire employees and so forth. All a mutual fund does with the capital it raises is --INVEST.

A mutual fund raises capital to invest it on behalf of its shareholders and that is the mutual fund's sole purpose for existence.

The mutual fund does not limit the number of investors nor the number of shares for sale. Mutual funds conduct an on-going or continuous offering of new shares. In this way mutual funds hope not only to obtain fresh new capital to invest on a regular basis, but also to provide a means by which existing shareholders can get out of their investment with maximum liquidity. The mutual fund not only offers new shares of ownership to investors each day, but also stands ready, willing and able to buy back or redeem its own shares from any investor who wishes to liquidate.

Why do mutual funds exist?
The primary reason that mutual funds exist is to fill a particular need of the investing public which is very difficult for the public to achieve on its own. There is a great demand on the part of investors to obtain desirable investment results and at the same time have as little risk as possible. The beginnings of the mutual fund industry came about to fill these two investment objectives: desirable investment results and reduced risk.

For whom are these investments suitable?
The average investor is looking for the best possible return on their investments while at the same time minimizing the risk of losing his principal. The person has a limited amount of money and who wishes to invest that money to get the best mileage out of it. The list of investment choices is an extremely lengthy one, including common stocks, preferred stocks, corporate bonds, municipal bonds, U. S. Government Federal Agency securities, or even an insured savings account at a bank or savings and loan association.

If the average investor had enough money to invest, he could create his own portfolio of investment securities and by doing so, would not only have the advantages of several different types of investments, but would also be spreading the risk of loss over many different types of investments and many different industries represented in the portfolio. The names specifically given to this concept of spreading risk is diversification and mutual funds diversify among different industries, among different companies in the same or complementary industries, and with different kinds of investment instruments.

It would take a great deal more money than the average investor has to create such a broadly diversified portfolio. Mutual funds provide a suitable solution for diversity. There are thousands of mutual funds in existence today representing numerous investment objectives, and within each fund classifications there are some funds that are conservative and others that are more aggressive in their investment objective.

Basic Objectives of Mutual Funds

A mutual fund whose stated objective is long-term growth is called a growth fund.  For the investor who wants the absolute safety of U.S. Government bonds, there are U.S. Government Bond funds. For the investor who wants tax-exempt income from a diversified portfolio of municipal securities, there are Municipal Bond funds. And for the investor who wants his money invested in high quality short-term obligations in the money market, such as Treasury Bills and other short-term debt obligations of some or similar quality, there are the very popular money market funds. These feature check-writing privileges for liquidity; most offer telephonic transfers to speed up availability of funds; money market funds are always a no-load; and all have daily dividends (although the dividends are credited to the account monthly).

In addition, to those basic types of mutual funds, over the last few years other-funds have increased in popularity. These additional fund types include option income funds; international and global funds, precious metals funds, and asset allocation funds (in which the investor, in essence, gives free rein to the manager to invest in virtually anything).