Mutual Funds

Investment Dictionary -> Mutual Funds

A mutual fund collects money from a number of investors and then invests them in money market instruments that are short term, stocks, bonds, and other securities types. It will have a fund manager responsible for regular trade with the money collected. Normally the net profits or the losses are distributed among the investors on an annual basis.

The types of investment companies known in the U.S., since 1940, have basically been three types-unit investment funds, closed-end funds and open-end-funds. The last are also known as mutual funds in the U.S.

The investment portfolios of the mutual funds are constantly a subject of adjustment and supervision by a manager. He is responsible for the cash flow forecasts as well as reporting on the investments that will perform well in the future in view of the fond. He will choose between those he deems worthy for the investment objective of the fond. The administration of the mutual fund is done under a contract with a management company, responsible also for the hiring of managers.

Under a special set of accounting and regulatory tax rules, the mutual funds in the U.S. are not taxed on income when it is distributed among their shareholders at 90 percent. The funds must also account for particular requirements in regard to the Internal Revenue Code. Distributions on municipal bond income, that is tax free, are also tax free for the shareholders. However depending on the way the fund has acquired distributions, the distributions subject to tax can be capital gains or ordinary income.

Several advantages are notable when the mutual funds are compared with individual stocks` investments. For example, divided among the shareholders of the mutual fund, the transaction costs are lower. A professional fund manager may also contribute to the investors` adequate decisions due to his expertise and dedication to managing the options for investment.

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