A pool of liquidity that an investment company places in various securities and/or derivatives with the goal of producing a certain return. Mutual funds may carry greater or lesser risk, depending on their particular investment goals. Mutual funds are actively managed by the company to maintain the investment goals. The company issues shares that represent a portion of ownership in each of the securities underlying the fund. Mutual funds are designed for investors who wish to take advantage of a highly diversified portfolio without a large amount of capital. See also: Open-end, Close-end.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
An investment company that continually offers new shares and stands ready to redeem existing shares from the owners. Because the shares are purchased directly from and are sold directly to the mutual fund, there is no secondary market in these companies stock. Individual mutual funds vary substantially in terms of the types of investments, their sales charges (many have none), and their management fees. Also called fund, open-end investment company. Compare closed-end investment company. See also clone fund, family of funds, load fund, regulated investment company.
Case Study Most research indicates a mutual funds short-term performance is not an accurate indicator of long-term performance. In other words, it is generally a mistake to choose a mutual fund based on the funds investment performance during the past quarter or the past year. Even consistent long-term performance may not be a fool-proof guide to selecting a fund. Fidelitys Magellan is considered the outstanding success story among the thousands of mutual funds that have been formed. Peter Lynch, the manager of Magellan for 13 years, became an almost mystical figure among institutional investors before voluntarily stepping down as manager in 1990. A reputation for excellent investment performance over many years caused the fund to grow to the point where, by mid-1996, it had 4.4 million shareholders and managed $56 billion in assets. Jeff Vinik, who took over the funds reins following the departure of Lynch also produced some excellent results. In early 1996, however, Vinik turned bearish and placed nearly 30% of Magellans assets in cash and long-term U.S. Treasury bonds. The conservative portfolio caused the fund to underperform in a market that exploded in initial public offerings and technology stocks. In May 1996, Fidelity announced Vinik would be leaving Magellan. His replacement was the manager of one of Fidelitys other mutual funds. Although Vinik apparently erred in becoming too conservative, many market watchers thought the real problem was that Magellan had become so large it was impossible to manage effectively.
Wall Street Words: An A to Z Guide to Investment Terms for Todays Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
A mutual fund is a professionally managed investment product that sells shares to investors and pools the capital it raises to purchase investments.
A fund typically buys a diversified portfolio of stock, bonds, and money market securities, or a combination of stock and bonds, depending on the investment objectives of the fund. Mutual funds may also hold other investments, such as derivatives.
A fund that makes a continuous offering of its shares to the public and will buy any shares an investor wishes to redeem, or sell back, is known as an open-end fund. An open-end fund trades at net asset value (NAV).
The NAV is the value of the funds portfolio plus money waiting to be invested, minus operating expenses, divided by the number of outstanding shares.
Load funds -- those that charge upfront or back-end sales fees -- are sold through brokers or financial advisers. No-load funds are sold directly to investors by the investment company offering the fund. These funds, which dont charge sales fees, may use 12b-1 fees to pass on the cost of providing shareholder services.
All mutual funds charge management fees, though at different rates, and they may also levy other fees and charges, which are reported as the funds expense ratio. These costs plus the trading costs, which arent included in the expense ratio, reduce the return you realize from investing in the fund.
A fund that sells its shares to the public only until sales reach a predetermined level is known as a closed-end fund. The shares of a closed-end fund trade in the marketplace the way common stock does.
Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
Regulated Investment Company (Mutual Fund)
A company or trust that uses its capital to invest in other companies. The two principal types are closed-end and open-end mutual funds. Shares in closed-end mutual funds, some of which are listed on stock exchanges, are readily transferable on the open market and are bought and sold like other shares. Open-end funds sell their own new shares to investors, stand ready to buy back their old shares, and are not listed.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary
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