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Personal Finance Act

Mutual funds are collective investment scheme operated by professionals who pool individuals’ investments and invests it in stocks, bonds, short-term money market instruments, and other securities. With the pooled money, the fund manager, also called the portfolio manager, can buy stocks and investors own a portion of the various stocks. Before investing in a mutual fund, an investor should read the prospectus, a description of the fund that includes which stocks comprise the fund. Investors can select mutual funds that match their investment ideals.

In 1991, there was $1. 347 trillion invested into mutual funds in the U. S. (including $368 billion in equity funds, $439 billion in bond and other fixed-income funds, and $540 billion in money market funds) and $1. 375 trillion invested into foreign mutual funds (including $396 billion in French mutual funds, $349 billion in Japanese mutual funds, and $175 billion in German mutual funds, with fixed-income and money market funds making up over 50% of the total). (Beth 1996) By 1997, there was about $4 trillion invested into U. S. mutual funds, of which over half was invested into stock funds. (Morris and Morris 1998) At present, the global worth of mutual fund investments equals over $26

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(Victor and Rosenbloom 2008) In recent times, investors are increasingly turning towards mutual funds in order to save for retirement and other financial objectives. EngineS OF MUTUAL FUNDS The most common types of mutual funds are stocks, bonds and balanced funds. Many mutual funds restrict themselves to only one category of investments such as domestic equities. However, some funds have the freedom to invest in a mixture of asset categories. For instance, balanced funds can invest in both equities and bonds, while asset allocation funds can invest in most any type of asset.

Other funds are restricted to only a specific subsection of an asset category, such as investment-grade bonds. Stock funds can be further divided into other classifications, based on the type of securities purchased: Growth funds invest in stocks that have high potential for capital appreciation and may not disburse dividend on a regular basis. Income funds focus on stocks that have a regular stream of dividends. Balanced funds can invest in both domestic equities and bonds Asset allocation funds can invest in most any type of asset (and these latter funds typically diversify into stocks, bonds, real asset investments, and foreign assets).

Sector funds may invest in the stocks of a particular industry, such as oil and gas or financial institutions’ stocks. OPEN-END FUNDS Some mutual funds called open-end funds also offer an additional service of offering to buy or sell any shares requested at the net asset value per share (NAV) at the end of any business day. Requests to buy or sell shares may be made directly to the fund, often via a toll-free 800 number, or through brokers and financial planners who agree to trade the mutual fund shares for investors (typically for a fee that is charged either to the investor or to the mutual fund).

(Victor and Rosenbloom 2008) CLOSED-END FUNDS Open-end mutual funds contrast with closed-end funds which are not required to redeem shares at the net asset value. Although closed-end funds are not obligated to redeem shares, these fund shares may usually be sold to other investors in the market at whatever price the other investors are willing to pay. (Morris and Morris 1998) HOW TO BUY AND SELL SHARES Investors buy shares of a mutual fund, and those shares rise or fall as the values of the stocks and bonds held by the fund rise and fall. Many funds charge an up-front fee for buying or selling shares of the fund.

Called loads, these fees help pay administrative expenses. However, there are some low-load and even no-load mutual funds. It’s easy to find out how mutual funds are performing. Many publicly held companies or mutual fund companies have their own Internet sites which have links to investor information. Through the Internet, investors can check on the current price of stocks or see graphs of recent performance. This information is also available in business sections of newspapers. Most newspapers run a weekly synopsis of mutual fund prices.


Front End Load This fee is used to pay commissions to a sales person. It is charged during the first year of owning a owning a mutual fund and can range from 3% to 8. 5%. Back End Load This means paying the sales charge when selling the fund, instead of when buying. This fee averages 3% and is charged when the mutual fund shares are sold. Redemption fee These are charged by some mutual funds to discourage short-term trading. Some investors want to constantly switch between mutual funds, so some firms use redemption fee to discourage this kind of “jumping around”.

Management Fee Portfolio managers and their support staff must be paid for their work. As such they receive the management fee, which averages 0. 50% of the total investment. References Hallman G. Victor, and Jerry S. Rosenbloom. Personal Financial Planning. New York: McGraw-Hill, 2008. Kobliner Beth. Get a Financial Life: Personal Finance in Your Twenties and Thirties. New York: Simon and Schuster, 1996. Morris Kenneth M, and Virginia B. Morris. The Wall Street Journal Guide to Understanding Money and Investing. New York: Lightbulb Press and Dow Jones & Co. , 1998.

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