Jump to navigation Jump to search A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The primary advantages of mutual funds are that they provide economies of scale, a higher level of diversification, they provide liquidity, and they are managed by professional investors. On the negative which Mutual Fund Is Best To Invest, investors in a mutual fund must pay various fees and expenses. Primary structures of mutual funds include open-end funds, unit investment trusts, and closed-end funds.
Mutual funds were introduced to the United States in the 1890s. In the United States, closed-end funds remained more popular than open-end funds throughout the 1920s. After the Wall Street Crash of 1929, the U. Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the SEC and that they provide prospective investors with a prospectus that discloses essential facts about the investment.
The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors. This act also created the Securities and Exchange Commission, which is the principal regulator of mutual funds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds. The Investment Company Act of 1940 established rules specifically governing mutual funds. 1950s, when confidence in the stock market returned. The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically. Among the new distribution channels were retirement plans. In 2003, the mutual fund industry was involved in a scandal involving unequal treatment of fund shareholders.
Some fund management companies allowed favored investors to engage in late trading, which is illegal, or market timing, which is a practice prohibited by fund policy. 4 trillion, according to the Investment Company Institute. In the United States, mutual funds play an important role in U. Luxembourg and Ireland are the primary jurisdictions for the registration of UCITS funds. These funds may be sold throughout the European Union and in other countries that have adopted mutual recognition regimes. Increased diversification: A fund diversifies holding many securities. Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund’s holdings. Most funds allow investors to redeem in this way at the close of every trading day. Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund’s investments.
Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets. Service and convenience: Funds often provide services such as check writing. Government oversight: Mutual funds are regulated by a governmental body. Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.
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The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the SEC and that they provide potential investors with a prospectus that discloses essential facts about the investment. Securities and Exchange Commission, which is the principal regulator of mutual funds. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U. The Investment Company Act of 1940 establishes rules specifically governing mutual funds.
The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. The Investment Advisers Act of 1940 establishes rules governing the investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. The National Securities Markets Improvement Act of 1996 gave rulemaking authority to the federal government, preempting state regulators. However, states continue to have authority to investigate and prosecute fraud involving mutual funds. Open-end and closed-end funds are overseen by a board of directors, if organized as a corporation, or by a board of trustees, if organized as a trust.
The Board must ensure that the fund is managed in the interests of the fund’s investors. The board hires the fund manager and other service providers to the fund. A fund manager must be a registered investment adviser. In the European Union, funds are governed by laws and regulations established by their home country. However, the European Union has established a mutual recognition regime that allows funds regulated in one country to be sold in all other countries in the European Union, but only if they comply with certain requirements. Regulation of mutual funds in Canada is primarily governed by National Instrument 81-102 “Mutual Funds.
NI 81-102 is implemented separately in each province or territory. The Canadian Securities Administrator works to harmonize regulation across Canada. The MPFA rules are generally more restrictive than the SFC rules. There are three primary structures of mutual funds: open-end funds, unit investment trusts, and closed-end funds. In the United States, open-end funds must be willing to buy back shares at the end of every business day.
In other jurisdictions, open-funds may only be required to buy back shares at longer intervals. Most mutual funds are open-end funds. 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. UITs generally have a limited life span, established at creation. Less commonly, they can sell their shares in the open market.
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Unlike other types of mutual funds, unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT. ETFs combine characteristics of both closed-end funds and open-end funds. ETFs are traded throughout the day on a stock exchange.