What Are Mutual Funds Essay Research Paper

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What Are Mutual Funds? Essay, Research Paper What is a Mutual Fund and How Does It Work? Think of a mutual fund as an investment company that pools the money of people just like you for one common reason — to make more. Not all pots of money, though, are alike. Each mutual fund has its own strategy and investment objective for making money. It’s up to you to select the right mutual fund for you based on your own needs. There are two types of mutual funds. The most common, which this book primarily talks about, is open-end funds. In essence, they are open – money flows directly into the fund when investors buy and goes directly out when they sell. The other type is closed-end funds, which technically are not mutual funds. You’ll learn more about them in Chapter 16.

With a mutual fund, the big pool of money we talked about previously is managed by a company, which frequently the organization that started the fund. This management company either serves as or hires the fund’s investment advisor. The advisor employs a portfolio manager and his or her research staff to select the investments for the mutual fund. Mutual funds are subject to strict federal regulations. The fund broker or other salesperson is required to give you a prospectus before you invest. The prospectus is an important document that spells out the investment objectives of the fund, risks, fees, and other important information. You’ll learn more about what’s in a prospectus and what you should look for in Chapter 9. The Securities and Exchange Commission (SEC) is the

U.S. government agency in charge of regulating mutual funds. Generally, mutual funds continuously offer new shares to the public. They also are required legally to buy back outstanding shares at the shareholder’s request. When you sell shares in a fund, you receive a check based on its share’s price or net asset value (less any sales charges, if applicable). The net asset value is obtained when the fund figures the value of its investments, less liabilities, divided by the number of shares outstanding at the end of the day. Technobabble: The investment advisor is an organization hired by the mutual fund company to manage a mutual fund’s investments. A portfolio manager is the professional who actually manages the fund. The investment objective describes what your mutual

fund hopes to accomplish. Assets represent any investment that the mutual fund holds, including stocks, bonds, and cash reserves. A mutual fund share is a unit of ownership in the fund. A mutual fund investor who owns shares is called a shareholder and has voting rights. Introducing: The Cast of a Mutual Fund Like any company, the mutual fund management company is an organization with a number of people that run the show. You want to understand how this company works because you’ve entrusted it with your hard-earned cash. Although mutual funds are set up under state law, usually as corporations, they differ from other companies. First, they are legally entitled to hire companies to handle the bulk of their services. They typically hire the investment advisor, also known as an

investment advisory firm, to manage your mutual fund. They also make arrangements to have the fund sold through a brokerage firm. The following sections review the cast of characters who make a mutual fund work. The Investment Advisor The investment advisor is one — or in some cases, a group — of the key people in a mutual fund, including the portfolio manager(s) and his/her/their staff. You’ve probably seen some portfolio managers on TV’s “Wall Street Week,” spotted their quotes in magazines, or read some of their books. This person selects, buys, and sells the investments based on the fund’s investment objectives. The investment advisor is paid an annual fee based on a percentage of the value of the fund’s cash and investments, or assets. The Board of Directors