Mutual Funds

Mutual Funds

The Investment Company Act of 1940 created mutual funds. Mutual funds are also known as investment companies, pooling investor's money and investing in securities on behalf of the investors. Investment companies provide an opportunity for the average person to participate in the stock market. The reason mutual funds have flourished over time is that they afford professional asset management, which includes more than buying securities. It also includes lots of research and diversification made possible through fractional share ownership. It would be extremely difficult for the average investing individual to accomplish this on their own.

The mutual fund accomplishes all of this by hiring a money manager, also known as a fund manager, or management company. The money manager has expertise in the management of the funds assets, which could be stocks, bonds, or other securities. The mission of the management company or fund manager is to oversee the trading, the buying and selling of securities in hopes of making a profit, and to grow the value of the portfolio. Bear in mind, as efficient as all of this may sound, there are various costs involved in the process, simply because you cannot get these benefits for free.

Are mutual funds appropriate for me?

Mutual funds do afford consumers professional management and diversification, along with the opportunity to profit by upward movements in the stock market. However, consumers should be aware of the risk, and consider the cost and expense issues prior to investing. Many who study today's market reference the portion of earnings that would have gone to the consumer, but are now designated to the mutual fund industry in the form of handling fees. These expenses may make it difficult for consumers to profit in times of low or negative stock market returns.

ETFs / Exchange Traded Funds

Exchange Traded Funds (or ETFs) have been available in the US since 1993 and in Europe since 1999. The idea of ETFs is to put funds and stock exchanges together, trading as an efficient security product. Traditionally, funds or cash and stock exchange investments have been carefully kept apart to reflect liquidity issues. An ETF is a basket of stocks, a fund invested with a stated investment objective. For example, there is a fund that will track an energy sector or a geographic area. Shares owned in this exchange traded fund by investors are, in turn, traded on an exchange.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.