| Q.
Where did mutual funds originate? |
A.
Investors
have pooled investment capital and hired professional management for
hundreds of years. From the era of Egyptian desert caravans through
the days of the great Dutch and English merchant empires, investors
spread the considerable risk of such ventures by pooling their investments
so that no one would be ruined by the loss of any one caravan or the
sinking of any one ship.
The
most famous English and Scottish pools, called investment trusts,
made investments accessible to the growing middle class of modest
investors. Investors with moderate means entrusted their money to
the management expertise of professional merchants and trading
companies. These were the models on which modern mutual funds are
based.
American
mutual funds developed during the late 1800s and the early 1900s.
As the American middle class grew and developed demand for investments,
individuals turned their money over to financial institutions to make
their investment decisions. The first mutual fund in the form we have
today was established in 1924. The American mutual fund industry has
grown rapidly in recent years-the number of active mutual funds increased
form 68 in 1944 to 3,952 in 1994.
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| Q.
How are mutual funds formed? |
A.
Mutual
funds are formed by a fund sponsor. The fund sponsor
may be a company that specializes in marketing mutual funds, or it
may be a bank or brokerage firm. Many sponsors establish several mutual
funds with various investment objectives, or what is called a
fund family.
An
investment company is the legal term for a mutual fund.
(The terms investment company, mutual fund,
and fund are often used interchangeably.) The formal
features of investment companies were established by the Investment
Company Act of 1940, the Investment Company Amendments Act of 1970
and the Investment Company Amendments Act of 1970. These laws were
designed to protect investors by requiring registration of all shares
being offered and full disclosure of the fund's investment goals;
its advisors, sponsors, distributors, etc; and all fees and charges.
The investment company is required to issue a prospectus
to fulfill full disclosure requirements. The prospectus must be provided
to all investors that purchase funds.
Prospectus: A
document filed with the Securities and Exchange Commission that
contains material information necessary for full disclosure for
solicitation purposes by the issuer and the distributor of securities.
For a mutual fund, material information may include the following:
investment objectives, advisors charges (fees), performance statistics,
and purchase and liquidation instructions.
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| Q.
Who carries out the business of a mutual fund? |
A.
The
mutual fund shareholders elect trustees who are responsible
for carrying out the activities of the fund. The trustees will appoint
an investment advisor, or management company,
which will be responsible for the fund's investment policies and management
decisions concerning the fund's portfolio. The mutual fund usually
pays the investment advisor a management fee based on a percentage
of the fund's assets. The trustees may also appoint a distribution
company to be responsible for the sales and marketing of the
fund's shares. The distribution company may work with sales organizations
such as brokerage firms, banks, etc. to arrange advertising for sales
directly to investors or do any combination of these in promoting
the fund to investors. The trustees will also appoint a transfer agent
to perform shareholder services such as accounting, communication,
and administration of distributions.
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| Q.
I have heard the term net asset value (NAV). What is it? |
A.
Net
asset value (NAV) is the value of all the assets owned by
a fund, net of liabilities. The net asset value per
share is the fund's total NAV divided by the number of shares
outstanding.
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| Q.
Is the NAV the same as the market price of my mutual fund shares? |
A.
It
depends on the type of mutual fund you own.
-
Open-end: The market price (liquidating value) of your
open-end shares is the NAV. In some open-end
funds, the offering or asked price (purchasing
price) may be higher than net asset value because it includes a
sales charge. Some open-end mutual funds have a contingent deferred
sales charge.
.
- Closed-end:The
market price of your closed-end fund shares may be substantially
above or below their
net asset value. After their initial offering, closed-end fund shares
are subject to market price fluctuations based on supply and demand.
.
- Unit
Investment Trusts:The market price of your UIT units will
generally be the same as the NAV.
Most
UIT sponsors provide a secondary market for the unit at NAV
plus any accrued interest, if appropriate.
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| Q.
I have heard of mutual fund expenses and fees. What are they? |
A.
All
mutual funds incur expenses. Generally, the expenses are deducted
from income before distributions to shareholders or deducted in the
calculation of NAV. Some mutual funds also charge a sales fee (referred
to as a "load"), which is added to the net asset value when
purchasing new shares or deducted from the NAV when selling. All expenses
and sales fees are disclosed in the prospectus.
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| Q.
What sales fees may I incur when investing in mutual funds? |
A.
Many
open-end mutual funds charge some form of sales fee, or load. Some
funds offer a choice of several load structures. The types of load
include:
- Front-end
load.
- Back-end
load.
- Level
load.
- No
load.
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| Q.
What is a front-end-load mutual fund? |
A.
Funds
that charge a front-end load usually depend on investment
brokerage firms to attract and service investors. The fund charges
a sales charge up front that is added to the NAV. On an ongoing basis,
the fund may also deduct yearly expenses and 12b-1 fees from the portfolio's
earnings. Shares sold with a front-end sales charge are often referred
to as "A" shares.
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| Q.
What is a back-end-load mutual fund? |
A.
Funds
that charge a back-end load usually depend on brokerage
firms to sell their shares to investors. Investors pay little or no
commission at the time the shares are purchased. Instead, they may
be subject to redemption fees, called contingent deferred sales charges
(CDSC), on the "back end". If you sell shares before a certain
date, your redemption proceeds will be reduced by the contingent
deferred sales charge. CDSCs usually decline as the shares
are held longer, disappearing altogether if the shares are held beyond
a certain number of years (usually from three to seven years). Yearly
expenses are also deducted from the portfolio's earnings. CDSCs are
always disclosed in a fund's prospectus. The CDSC is waived upon the
death of the shareholder if the prospectus contains such a provision.
Shares sold with a back-end sales charge are often referred to as
"B" shares.
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| Q.
How important are expenses and fees in mutual fund investing? |
A.
Expenses
and sales charges obviously reduce a mutual fund's performance. Between
two mutual funds with identical portfolio performance, the fund with
lower expenses and fees will be a better investment. You must weigh
the expense and fee factor against your other investment criteria,
such as investment objectives and risk tolerance. How well a fund
meets your investment objectives and the fund's long-term performance
should be more important than expenses and fees alone.
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| Q.
Why should I consider investing in mutual funds? |
A.
Mutual
funds are an alternative form of owning the individual investments-such
as stocks and bonds-that compose the fund's portfolio. Some investors
prefer to hold the individual stocks or bonds, but others invest in
mutual funds for several reasons, including:
- Professional
management.
- Diversification.
- Investment
convenience.
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| Q.
How does a mutual fund's professional management benefit me? |
A.
While
you can perform your own research and invest directly in individual
securities, you may lack the resources, time, and expertise to do
so. By investing in a mutual fund, you are hiring professional investment
advisors who do have the resources, time and expertise to manage your
assets pooled with the assets of others who have the same investment
objectives.
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| Q.
How does a mutual fund's diversification benefit me? |
A.
The
many investors who do not have large amounts of money to invest cannot
buy enough individual stocks or bonds to build a diversified portfolio,
Diversification, and important investment discipline, reduces an investor's
dependence on any one issue's success or failure. A mutual fund offers
investors instant diversification by providing a professionally managed
portfolio suitable for your investment objectives.
An
investor may achieve even wider diversification by holding a variety
of mutual funds with different investment objectives or styles of
management.
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| Q.
How can mutual funds provide me investment convenience? |
A.
Mutual funds offer many
features that are not always available to you in other
investments. Such features may include:
-
Full and fractional shares.
With open-end funds, you can invest or withdraw the exact dollar
amount you want, since the fund will issue full and fractional shares
to accommodate the dollars invested. Fractional shares are usually
carried to three decimal places (for example, 181.748 shares).
- Rights
of accumulation.
Most mutual funds with sales charges offer discounts when larger
amounts of money are invested. For example, a sales charge may decrease
from 5.75 percent to 4.5 percent for investments over $50,000. This
means that the sales charge would be reduced when you make a $50,000
investment. Rights of accumulation allow you the discount on additional
investments if your total balance, including the amount you invest,
is above the threshold, no matter how small the investment that
sends the balance over the threshold. For example, if the value
of your mutual fund account is $40,000 and you add $10,000 to your
account, the additional investment would have a sales charge based
on $50,000.
- Periodic
investment plans.
You may wish to invest a certain amount in several installments
over a period of time. Under a periodic investment plan, you can
mail checks to the fund on specific dates or the fund can arrange
a withdrawal of specific amounts from your checking account for
automatic investment on the dates specified.
This
feature may allow you to engage in the dollar cost averaging investment
method rather than investing large amounts of money at one time.
Periodic investing is a particularly good method for beginning investors,
as it enables them to invest nominal amounts.
- Automatic
reinvestments. Most
mutual funds offer you the ability
to reinvest dividends
and capital gains distributions into additional shares of the fund.
Additionally, the fund may offer to invest the distributions in
shares of another funds in the same sponsor's family of funds.
- Systematic
Withdrawal features
allow you to designate a specific
amount you wish to receive
from your fund on a regular basis. Many funds will give you a choice
of how you may receive your distribution. You may receive a check,
or you may have the distribution deposited directly to your bank
account. If you wish to receive $200 monthly, for example, a fund
offering systematic withdrawal will send you that amount whether
or not your investment produced $200 in the month. If your fund
investment produced more than $200, the excess will remain in your
mutual fund account, adding to your fund's investment value. If
your investment earned less, the shortage would reduce the value
of your account. Either way, you can count on receiving your planned
distribution amount.
Note:
You may want to establish a specified withdrawal
rate lower than the anticipated total return of the fund so the
value of the fund will continue to grow despite the withdrawals.
If the value increases as anticipated, you should
be
able to increase future withdrawals
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| Q.
How do I choose a mutual fund?
|
A.
As with any type of investment, you should consider
your needs and choose accordingly:
-
Determine your investment objectives.
- Choose
the type of mutual fund appropriate for your objectives.
-
Gather information on the individual mutual funds within your chosen
fund type.
-
Choose the mutual fund that best suits your criteria for investment
performance, risk, expense, etc.
- Request and review
the mutual funds prospectus and consult with a GlobaLink financial
consultant before investing.
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| Q.
What types of mutual fund investment objectives are there?
|
