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Mutual Funds: Equity, Bond, and Money Market Varieties - Essay Example

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Mutual Funds: Equity, Bond, and Money Market Varieties

The precise nature of the gain or loss, whether ordinary or capital in nature, depends upon the nature of the underlying investment in which the fund participates. The main concept, in short, is that individual investors pool their investments through the larger investment vehicle known as a mutual fund.
It can be misleading, in some respects, to speak of a mutual fund as a uniform type of investment vehicle. This is because mutual funds are possessed of many different characteristics, with different investment goals, and with different areas of investment expertise. Some mutual funds, for instance are more suitable for long-term investors while others focus their research and trading strategies on particular industries or financial indexes. This essay will discuss the fundamental characteristics and the significance of the mutual fund as an investment option in the United States of America. It will then examine the different types of mutual funds in which individual investors may participate. Particular attention will be paid to the definition of the mutual fund structure and the creative ways in which mutual fund investment opportunities have been made available to the common investor as well as the professional investor.
As an initial matter, it is important to note what types of investment structures constitutes a mutual fund and which types of investment structures do not constitute a mutual fund. ...
As a matter of definition, therefore, the first point to be aware of is that a mutual fund is a company. Investors, as a result, are investing their money in a company rather than in an individual stock or other financial instrument. These companies are also known as "open-ended companies" and are not to be confused with other types of investments, such as close-ended funds and unit investment trusts.
The mutual fund is distinguished from other investment structures in a variety of ways. First, the mutual fund is a flow-through investment structure; more particularly, the individual or institutional investor must purchase shares of the mutual fund from the investment company itself or through a registered broker. The initial shares purchased, consequently, are in the mutual fund itself rather than in any outside secondary markets. The price paid for these mutual fund shares is determined by calculating a net asset value (NAV) for the investments underlying a particular mutual fund in addition to associated purchase or broker fees. A second major characteristic of a mutual fund is that its shares are redeemable. This is an important and distinguishing characteristic. Rather than being able to sell their mutual fund shares to outside investors, it is instead required that the mutual fund shares must be sold back to the mutual fund itself or to a broker authorized to transact business on behalf of the mutual fund. A third feature of a mutual fund is that the mutual fund company will sell its shares on a rolling basis. This means that, as a general rule, the mutual fund company continues to make available its shares to interested investors; as noted ...Show more

Summary

The pooling of investments is the underlying principle of a mutual fund. Rather than allocating one's money to a particular investment, for instance a stock or a bond, a collective fund is established, professionally managed, and then invested on behalf of a large group of investors…
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Mutual Funds: Equity, Bond, and Money Market Varieties essay example
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