61. What do you know about mutual funds?

A mutual fund is a type of professionally managed collective investment scheme that pools money from many investors to purchase securities.

Most mutual funds are open-ended, meaning stockholders can buy or sell shares of the fund at any time by redeeming them from the fund itself, rather than on an exchange.

In the United States, mutual funds must be registered the Securities and Exchange Commission, overseen by a board of directors (or board of trustees if organized as a trust rather than a corporation or partnership) and managed by a registered investment adviser.

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. Within these categories, funds may be subclassified by investment objective, investment approach or specific focus.

Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as a substitute for bank savings accounts, though money market funds are not government insured, unlike bank savings accounts.

Bond funds invest in fixed income or debt securities. Bond funds can be subclassified according to the specific types of bonds owned (such as high-yield or junk bonds, investment-grade corporate bonds, government bonds or municipal bonds) or by the maturity of the bonds held (short-, intermediate- or long-term).

Stock or equity funds invest in common stocks which represent an ownership share (or equity) in corporations. Stock funds may invest in primarily U.S. securities (domestic or U.S. funds), in both U.S. and foreign securities (global or world funds), or primarily foreign securities (international funds). They may focus on a specific industry or sector.

Hybrid funds invest in both bonds and stocks or in convertible securities. Balanced funds, asset allocation funds, target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid funds.

There are 3 principal types of mutual funds in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds.

Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value.

Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund).

Unit investment trusts or UITs issue shares to the public only once, when they are created. UITs generally have a limited life span, established at creation. Investors can redeem shares directly with the fund at any time (as with an open-end fund) or wait to redeem upon termination of the trust. Less commonly, they can sell their shares in the open market.

Mutual funds have advantages compared to direct investing in individual securities. These include:

• Increased diversification: A fund must hold many securities. Diversifying reduces risks compared to holding a single stock, bond, other available instruments.

• Daily liquidity: Shareholders may trade their holdings with the fund manager at the close of a trading day based on the closing net asset value of the fund's holdings. However, there may be fees and restrictions as stated in the fund prospectus.

• Professional investment management: Actively managed funds may have large staffs of analysts who actively trade the fund holdings.

• Ability to participate in investments that may be available only to larger investors: Foreign markets, in particular, are rarely open and affordable for individual investors. Moreover, the research required to make sensible foreign investments may require knowledge of another language and the rules of regulations of other markets.

• Service and convenience: This is not a feature of a mutual fund, but rather a feature of the fund management company.

• Government oversight: Largely, the US government's role with mutual funds is to require the publication of a prospectus describing the fund. No such document is required for stock, bonds, currencies, and other investment instruments. There is no governmental oversight of a fund's investment success/failure.

• Ease of comparison: Since mutual funds are available from many providers, it is generally easy to find similar funds and compare features such as expenses.

Mutual funds have disadvantages as well, which include:

• Fees

• Less control over timing of recognition of gains

• Less predictable income

• No opportunity to customize