What Is a Mutual Fund?
Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy.
Mutual Fund Characteristic (1)
A mutual fund is an open-end investment company or fund
Open End Fund
An open-end fund is a diversified portfolio of pooled investor money that can issue an unlimited number of shares. The fund sponsor sells shares directly to investors and redeems them as well. These shares are priced daily, based on their current net asset value (NAV).
Mutual Fund Characteristic (2)
Mutual funds generally sell and purchase their shares on a continuous basis, although some funds will stop selling when, for example, they reach a certain level of assets under management
a unit or share of a mutual fund,
Mutual fund shares can typically be purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—doesn't fluctuate during market hours, but is settled at the end of each trading day.
NAV (Net Asset Value)
NAV represents the per share/unit price of the fund on a specific date or time. NAV is the price at which the shares/units of the funds registered with the U.S. Securities and Exchange Commission (SEC) are traded (invested or redeemed).
Mutual Fund Characteristic (3)
Mutual fund shares are redeemable. This means that when mutual fund investors want to sell their fund shares, they sell them back to the fund or to a broker acting for the fund.
Mutual Fund Characteristic (4)
Mutual funds are registered with the SEC and subject to SEC regulation
Index Mutual Fund
a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover
Mutual Fund Portfolio
A mutual fund pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio.
Stock Market Index
A market index is a hypothetical portfolio of investment holdings which represents a segment of the financial market.
Stock Market Index Characteristic (1)
Hypothetical Portfolios and powerful indicators for global and country-specific economies.
Stock Market Index Examples
In the United States the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite are the three most broadly followed indexes by both the media and investors. In addition to these three indexes there are approximately 5,000 others that make up the U.S. equity market.
Stock Market Index Characteristic (2)
Investment managers use indexes as benchmarks for performance reporting. Meanwhile, investors of all types use indexes as performance proxies and allocation guides.
one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S. and focuses on the U.S. market's large-cap sector
refers to the total dollar market value of a company's outstanding shares. Commonly referred to as "market cap," The investment community uses this figure to determine a company's size, as opposed to using sales or total asset figures.
Large Cap Characteristic (1)
a company with a market capitalization value of more than $10 billion.
Large Cap Characteristic (2)
Large cap stocks represent 91% of the total U.S. equities market as measured by the Wilshire 5000 Total Market Index.
Large Cap Characteristic (3)
Large cap companies are typically transparent, making it easy for investors to find and analyze public information about them.
Large Cap Characteristic (4)
Dividend payers: Large cap, stable, established companies are often the companies investors choose for dividend income distributions. Their mature market establishment has allowed them to establish and commit to high dividend payout ratios.
Large Cap Characteristic (5)
Stable large cap stocks are typically blue chip companies at peak business cycle phases, generating established and stable revenue and earnings.
Large Cap Characteristic (6)
Impactful:tend to move with the market economy because of their size.
something that serves as a standard by which others may be measured or judged
Small Cap Characteristic (1)
Small cap stocks are generally defined as the stock of publicly traded companies that have a market capitalization ranging from $300 million to about $2 billion.
Small Cap Characteristic (2)
Growth potential: small cap companies show a significantly higher growth potential.
Small Cap Characteristic (3)
Analysts typically give little attention to these companies; thus, there is a high probability of improper pricing of small cap stocks. This situation creates vast opportunities for investors to leverage the inefficiencies in market pricing and earn a great return on their investments.
Small Cap Characteristic (4)
Small Cap Characteristic (5)
Small cap stocks are less liquid than their large counterparts. Low liquidity results in the potential unavailability of the stock at a good price to purchase or it may be difficult to sell the stocks at a favorable price. Low liquidity also adds to the overall risk of the stock.
Mid Cap Characteristic (1)
Mid-cap is the term given to companies with a market capitalization (value) between $2 and $10 billion
Mid Cap Characteristic (2)
expected to grow and increase profits, market share and productivity, which puts them in the middle of their growth curve.
MId Cap Characteristic (3)
less risky than small-caps, but more risky than large-caps.
DIJA (Dow Jones Industrial Average)
It consists of 30 large, publicly traded firms in the United States.
NASDAQ (National Association of Securities Dealers Automated Quotation )
which stands for the system, is a computerized system for stock trading.Nasdaq stocks typically have four- or five-letter symbols
NYSE (New York Stock Exchange)
is a stock exchange located in New York City that is considered the largest equities-based exchange in the world, based on the total market capitalization of its listed securities
plural form of index.
More about Mutual Funds
Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different features, risks, and rewards.
Money Market Mutual Fund
a type of mutual fund developed in the 1970s as an option for investors to purchase a pool of securities that generally provided higher returns than interest-bearing bank accounts. Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. Many investors use money market funds to manage their cash and other short term funding needs.
"Break the Buck"
Breaking the buck occurs when the net asset value (NAV) of a money market fund falls below $1.
A bond fund is a fund invested primarily in bonds and other debt instruments. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, in addition to other debt securities like mortgage-backed securities (MBS).
Corporate Bond Fund
A corporate bond is a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds.
Government Bond Fund
Treasury securities—including Treasury bills, notes, and bonds—are debt obligations issued by the U.S. Department of the Treasury. Treasury securities are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. The income from Treasury securities is exempt from state and local taxes, but not from federal taxes.
Stock Funds (Equity Funds) Mutual Growth Fund
focus on stocks that may not pay a regular dividend but have potential for above-average financial gains.
Income Mutual Fund
invest in stocks that pay regular dividends
Index Mutual Fund
track a particular market index such as the Standard & Poor’s 500 Index.
Sector Mutual Fund
specialize in a particular industry segment.(ie:energy, healthcare, industrials)
Target Date Mutual Fund
Life Cycle Funds
designed for individuals with particular retirement dates in mind hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund’s strategy.
Ways to Earn Money with Mutual Funds
Dividends, Capital Gains Distributions, Increased NAV
Capital Gains Distribution
is a payment to shareholders that is prompted by a fund manager's liquidation of underlying stocks and securities in a mutual fund, or derived from dividend and interest earned by the fund's holdings minus the fund's operating expenses.
Phantom Gains (Mutual Fund)
A phantom gain is a situation in which an investor owes capital gains taxes even though the investor’s overall investment portfolio may have declined in value.
Phantom income is income that is attributed to one's tax liability, but without receiving the cash to offset the tax liability,
consequences that can be triggered when mutual fund shares are redeemed, yet many investors are not aware of these events. Examples of these consequences include fees, charges, commissions and expenses that reduce an investor's anticipated return
Mutual Fund Share Class
mutual fund, with one portfolio and one investment adviser, may offer more than one "class" of its shares to investors. Each class represents a similar interest in the mutual fund's portfolio. The principal difference between the classes is that the mutual fund will charge you different fees and expenses depending on the class you choose
Contingent Deferred Sales Charge (CDSC)
For B shares, CDSCs normally decline over time and, eventually, are eliminated after six years from the purchase of those shares.
The expense ratio includes management fees, marketing and distribution fees (often called 12b-1 fees) and other ongoing fees that are deducted from a mutual fund's assets. These fees pay for the services of the mutual fund's investment adviser, the selling advisor or broker, transfer agent, and for other expenses. Front-end sales charges and CDSCs are not included in the expense ratio because they are charged once, and directly to the investor.
an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25% and 0.75% (the maximum allowed) of a fund's net assets
Front-End Sales Charge
This fee is charged when you purchase Class A shares in a mutual fund
A mutual fund may offer you discounts, called breakpoint discounts, on the front-end sales charge if you:
Make a large purchase.
Already hold other mutual funds offered by the same fund family.
Commit to regularly purchasing the mutual fund's shares.
Asset-Based Sales Charges
fees you would not pay directly, but which are taken out of a mutual fund's assets to pay to market and distribute its shares
Mutual Fund Family
A family of mutual funds is a group of funds that are marketed under one or more brand names, usually having the same distributor (the company which handles selling and redeeming shares of the fund in transactions with investors), and investment advisor (which is usually a corporate cousin of the distributor).
Mutual Fund Share Prices
You can only purchase mutual fund shares at the end of the day. Unlike exchange-traded securities, the value of mutual fund shares does not fluctuate throughout the day. Instead, the fund calculates the net value of all the assets in its portfolio, called the net asset value (NAV), when the market closes each day. The market closes at 4 p.m. Eastern Time, and mutual funds typically post their current NAVs by 6 p.m
Early Redemption Fee
also referred to as a “redemption fee”, “market timing fee”, or “short-term trading fee”, is a charge by a mutual fund company to discourage investors from making a short-term “round trip” (i.e. a purchase, typically a transfer, followed by a sale within a short period of time).
is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public.
the month, day and year that an order is executed in the market. The trade date is when an order to purchase, sell or otherwise acquire a security is performed.
The number of days between the trade date and the settlement date. The trade date is the day on which investors agree on the security transaction, while the settlement date is the day securities change hands and payment is made. Different types of transactions have different settlement periods
T+1 T+ 2 T + 3
transaction date ('T') and the settlement date. The abbreviations T+1, T+2, and T+3 refer to the settlement dates of security transactions that occur on a transaction date plus one day, plus two days, and plus three days, respectively. 'T' is the transaction date.
Morningstar Risk Rating
a measure of a fund's risk-adjusted return, relative to similar funds. Funds are rated from 1 to 5 stars, with the best performers receiving 5 stars and the worst performers receiving a single star.
Standard deviation measures the dispersion of a dataset relative to its mean.
A volatile stock has a high standard deviation, while the deviation of a stable blue-chip stock is usually rather low.
As a downside, it calculates all uncertainty as risk, even when it’s in the investor's favor—such as above average returns.
for load mutual funds, is the dollar amount for the purchase of the fund's shares that qualifies the investor for a reduced sales charge.
LOI Letter of Intent
A letter of intent (LOI or LoI, and sometimes capitalized as Letter of Intent in legal writing, but only when referring to a specific document under discussion) is a document outlining the understanding between two or more parties which understanding they intend to formalize in a legally binding agreement.
Balanced Fund is a type of Mutual Fund whose main objective is to diversify risk by holding a defined percentage of different security types including stocks, bonds, and money market instruments
The Sharpe ratio tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. This measurement is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment's Sharpe ratio, the better its risk-adjusted performance.
According to Morningstar, a mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index.
Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being "closet" index funds.
professional portfolio management with investment and advisory fees
AUM Assets under Management
Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.