subject: Understanding Mutual Funds Part Two [print this page] In my first article in my series on mutual funds, I did not even get a chance to touch on the subject of mutual funds! I very quickly went over securities, which we agreed is something that represents money. I wrote about two types of securities, stocks and bonds. We talked about stock markets and bonds markets, and how if you wanted to invest in or sell stocks and bonds you are going to need the help of a dealer or broker.
Now let us go over mutual funds. In essence, a mutual fund pools money from a number of different investors and invests in different sorts of securities. Mutual funds will have a fund manager that buys and sells the fund's investments. Under United States law, the Securities and Exchange Commission (SEC) and the Internal Revenue Service tell mutual funds that mostly all of their net income that they bring in must be distributed to its investors at least once a year.
Mutual funds are structured as corporations or trusts, and the term mutual fund is another name for what the SEC classifies as an open end investment company. All being open ended means is that at the end of every day, the fund will issue new shares to investors that are interest in buying into the fund, and the fund is obligated to purchase shares back from investors redeeming their shares.
Most mutual funds are looked over by trustees or a board of directors who ensure that the fund is being managed properly and that it is being managed in the best interests of the fund's investors.
Mutual funds have to be registered with the SEC and they have to give interested investors a report called a prospectus. The prospectus is full of contains information about the fund, fund manager, and the securities it invests in. To Be Continued In Part Three
