Site search Web search

Mutual means a sharing of interests. In addition, a mutual fund is a practical and efficient way for individuals with similar goals to pool money in an effort to achieve those goals.

In a mutual fund, the combined dollars of many shareholders are invested in a diversified group of securities so each individual’s share of this portfolio represents a proportional interest in many individual companies.

A mutual fund is an investment company that collects, usually in small dollar amounts, the savings of many individuals. It then invests these funds in the securities of various other corporations. It is an arrangement whereby the savings of many small savers are pooled to become one large fund managed collectively for the benefit of all participants.

Mutual funds are managed by investment companies that receive a fee. Normally, it is a percentage of total assets within the fund. In some cases, commissions are paid for sales and marketing as a percentage of the initial investment, or if made under certain circumstances.

Five general advantages may accrue to the buyer of mutual funds, especially to the small investor, as opposed to buying stocks or bonds directly:

Some of the services offered include automatic reinvestment of both dividends and capital gains distributions, monthly investment plans, withdrawal plans, bank by telephone, quantity discounts, exchange privileges from one fund to another, on line services and, frequently, checking services.

Each shareholder may then get the benefit of the many advantages otherwise available to only wealthier and more sophisticated investors who have the resources to spread investments among many businesses.

Just as there are different goals, there are many types of mutual funds with different investment objectives.

These seek maximum capital gains as an investment objective. Current income is not a significant factor. Some may invest in stocks somewhat out of the mainstream, such as those in fledgling companies, new industries, companies fallen on hard times or industries temporarily out of favor. Some may also use specialized investment techniques, such as option writing or short-term trading.

The primary investment objective of these funds is long-term growth of capital. To achieve this objective, they invest primarily in common stocks of well-established companies with growth potential. Their primary aim is to produce an increase in the value of the investments through capital gains, rather than a flow of dividends. This type of fund is appropriate for the investor who is not concerned with current income.

These funds invest in common stocks of companies that have had increasing share value, but also have a solid record of paying dividends. The purpose is to provide shareholders with attractive monthly income and with the opportunity to increase the value of investments through long-term growth.

These generally have a three-part investment objective:

These funds have an investment policy of "balancing" the portfolio between bonds, preferred and common stocks, as they believe market conditions dictate. This type of fund generally appeals to individuals interested in a "timing" approach to investing.

Might be 100 percent invested in stocks OR bonds OR money market securities, depending on market conditions. These funds give money managers the greatest flexibility in anticipating and responding to their perception of future economic changes.

The primary objective of these funds is to make higher interest securities available to the average investor who wants immediate income, daily liquidity and high investment safety. This is achieved through the purchase of high yield government or government backed notes. These are generally the safest; most stable securities available, and include Treasury bills, certificates of deposit of large banks and commercial paper (the short-term IOUs of large U.S. corporations). These funds generally offer checking and wire transfer services, and a few even offer a credit card that debits the account balance.

For individuals whose primary investment objective is current income rather than growth of capital, income funds can offer generous monthly income. These funds usually invest in stocks and bonds that normally pay high dividends and interest.

For investors seeking a high current return, these funds invest primarily in dividend paying common stocks on which call options are traded on national securities exchanges. Current return generally consists of dividends, premiums from expired options, net short-term gains from sales of portfolio securities on exercises of options and any profits from closing purchase transactions.

Seek a high level of current income for shareholders by investing at all times in a mix of corporate and government bonds. If invested in long-term bonds, the income might remain fairly constant, but the market value will fluctuate with changes in interest rates.

Seek a high level of current income for shareholders by investing primarily in equity securities of companies with good dividend paying records. The objective is to provide an income that gradually increases each year.

Seek a high level of current income for shareholders by investing in income producing securities, including both equity (stocks) and debt (bonds) instruments.

The types of organizations that issue bonds fall into three broad categories:

This also includes non-profit organizations.

Each of these is subject to somewhat different tax treatment. This tax treatment has an effect on the price of the bonds and the bond interest (coupon) rate. Bonds issued directly by corporations are fully taxable to individuals at both state and federal level. For that reason, the rate must be higher. Bonds issued by the federal government are frequently exempt from state income tax, but are taxable by the federal government. Bonds issued by state or local agencies are exempt from federal tax and may also be exempt from taxation at the state level.

These funds seek to generate a high level of current income by investing primarily in the senior securities of profit corporations. Some funds concentrate primarily on high-grade bonds and thus are able to provide shareholders with a greater degree of safety, but usually with less income than bond funds that may have a mixture of high, medium and lower grade bonds. Some of the portfolio may be in U.S. Treasury bonds or bonds issued by a federal agency.

These funds specialize in selecting rated bonds to insure the highest yield possible with a reasonable degree of safety. This type of fund appeals to individuals who seek high current income or desire to reinvest dividends and capital gain distribution, thus compounding income at a high rate of return. Usually, these funds maintain at least two-thirds of the portfolio in lower rated corporate bonds (Baa or lower by Moody’s rating service and BBB or lower by Standard and Poor’s rating service). In return for a higher yield, investors must bear a greater degree of risk than for higher rated bonds.

These funds invest in a broad range of tax-exempt bonds issued by states, cities and other local governments. Interest obtained from the bonds is passed through to shareowners free of federal tax.

Invest in bonds issued by states and municipalities to finance schools, highways, hospitals, airports, bridges, water and sewer works and other public projects. In most cases, income earned on these securities is not taxed under state and local laws. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax.

Invest in municipal securities with relatively short maturities. They are also known as tax exempt money market funds. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax.

Either short-term or long-term portfolios of bonds. These work just like other municipal bond funds (see above) except their portfolios contain the issues of only one state. A resident of that state has the advantage of receiving income free of both federal and state tax. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax.

Invest in a variety of government securities. These include U.S. Treasury bonds, federally guaranteed mortgage backed securities, and other government notes.

Invest in mortgage securities backed by the Government National Mortgage Association (GNMA). To qualify for this category, the majority of the portfolio must always be invested in mortgage backed securities. In some cases, these funds make distributions that are both principal and income.

Invest in equity securities of companies located outside the U.S. Two-thirds of the portfolios must be so invested at all times to be categorized here.

Invest in debt securities (bonds) of companies and countries worldwide. Some funds invest in U.S. Bonds, others do not.

Invest in securities traded worldwide, including the U.S. Compared to direct investments, global funds offer investors an easier avenue to investing abroad. The professional money managers of each fund handle the trading and record keeping details and deal with differences in currencies, languages, time zones, laws and regulations and business customs and practices. In addition to another layer of diversification, global funds add another layer of risk - exchange rate risk.

These invest in the securities of corporations or governments in a specific country or region. Thus, the owner has two areas of risk that also means two areas of opportunity:

Thus, it is possible for a "Japan Fund" to increase in share value and at the same time increase in value to a U.S. owner if the yen/dollar rate change is also favorable.

Maintain two-thirds of the portfolios in securities associated with mining or processing of gold, silver and other precious metals.

Others types of mutual funds include:

These are a group of the above funds all managed by the same organization. Their structure permits investors to switch funds from one fund to the other for a nominal fee or none at all. These are suitable for use with a Market Timing Service or within a qualified retirement plan where the owner may want to switch the underlying investment without incurring new acquisition costs.

Securities offered through Sigma Financial Corporation. A registered broker/dealer. Member FINRA & SIPC.

Send mail to Webmaster with questions or comments about this web site.
Copyright © 2007 R & D Financial Services Inc.
Last modified: 11/04/07