Mutual fund

History
See Mutual Fund History

Structure
The Structure of a Mutual Fund

Investment Company Institute's (ICI) 2009 ICI Fact Book

Mutual Fund Advantages

 * 1) Diversification: The first principle of mutual fund investing is broad diversification of securities. Diversification greatly reduces and can even eliminate the specific risk that comes with the ownership of just a few individual stocks and bonds. Until the advent of mutual funds it was impossible for ordinary investors to own enough securities to minimize non-market risk.  Now, even a beginning investor with $1,000 can invest in a mutual fund holding thousands of individual securities so that the decline or bankruptcy of a single security will have almost no influence on the portfolio.
 * 2) Professional Management: Managing and holding an investment portfolio entails selecting and supervising the fund's holdings. Managers  must do so based on the fund's objectives and policies.  Managers of index funds attempt to mimic their benchmark index.  Index fund managers make no attempt to select "winning" securities.  Managers of managed funds attempt to add value by selecting securities they think will attain above-average performance within the fund's objectives.
 * 3) Liquidity: Many securities (hedge funds, limited partnerships, real estate, CDs, etc.) cannot be sold quickly and without penalty.  However, most  mutual fund shares may be acquired or liquidated at a moment's notice at the fund's next determined net asset value per share.  Also, mutual funds can easily be converted into cash at a fraction of the cost (a few  funds have redemption fees) that would be incurred when selling individual stocks or bonds. This is also true when exchanging mutual funds.
 * 4) Convenience: Mutual Fund prices and performance are readily available in newspapers, magazines, internet and research organizations such as Morningstar.  Purchases can be made through brokers or directly with fund companies.  Mutual fund companies provide automatic reinvestment of dividends and capital gains distributions, tax reporting, programs for regular additional investments and for systematic withdrawals, check writing on money market funds, and even telephone exchanges among different funds within the same family.  Redemptions can usually be made with a simple phone call.

Money Market Funds
See Money Markets

Money Market funds are mutual funds that invest in short term (less than one year) money market instruments. Money market fund investments include treasury bills, commercial paper, bank CD's and Banker Acceptances. By design, they are meant to maintain stable net asset valuations of 1.00 per share and provide investors with interest dividends. They are thus suitable investments for savings and other short term needs. While money-market funds are low risk, they are not zero-risk. In the event that some of the underlying investments default, the fund may not be able to maintain a net asset value of $1.00/share; this failure is colloquially known as breaking the buck. As of November, 2009, there have been only a few cases when this has actually happened. Most notably, two money-market funds of The Reserve Funds broke the buck in September, 2008, after Lehman went bankrupt.

Money funds are characterized by the underlying investments comprising the portfolio. This specialization allows for funds to be differentiated by risk and tax characteristics. Money funds include:


 * General Money Funds: These funds invest in a large gamut of money fund instruments: treasury bills, CD's, Yankee CD's, Eurodollar CD's, Commercial Paper, and Banker's Acceptances. These funds are usually heavily weighted towards the non-treasury instruments. Since these instruments are exposed to credit risks, they provide higher interest coupons than treasuries (this excess interest can be called the default risk premium). The non-treasury component of a General Money Market Fund is taxable income for both federal and state jurisdictions.


 * Treasury Money Funds: Treasury money funds invest 100% in "full faith and credit" treasury bills and agency instruments. Thus they are not subject to credit risk (since the treasury has monopoly power to print fiat currency.) Treasury interest is exempt from state income taxation.


 * Tax Exempt Funds: These funds invest in municipal money market instruments. The interest is generally exempt from federal taxation (although some interest may be subject to the alternative minimum tax.) State Specific Tax Exempt Funds invest in municipal securities of an individual state and thus provide federal, state, and sometimes local tax exempt interest for state residents. Tax exempt funds are subject to credit risk as well as the risk of tax law change to their exemption status.

Bond Funds
See Bond Basics

Bond mutual funds invest in fixed income securities with maturities ranging from one year to thirty (or more) years. Typically, a bond fund will be a part of series of funds providing short, intermediate, and long term maturities:


 * Short Term Bond Funds: maturities between 1 year and 5 years.
 * Intermediate Term Bond Funds: maturities between 5 years and 10 years.
 * Long Term Bond Funds: maturities greater than 10 years.

Bond Funds may hold the following types of bonds:
 * Government Bonds
 * Corporate Bonds
 * Asset-backed Securities
 * Tax-exempt Bonds
 * Foreign Bonds



Stock Funds
See Stock Basics

Fund of Funds
See Fund of funds

Index Funds
see Indexing

Closed End Funds
See Closed End Funds

Exchange Traded Funds
See Exchange Traded Funds

Links

 * SECInvest Wisely: An Introduction to Mutual Funds
 * Overview Of The Mutual Fund Industry Richard Loth, Investopedia