What are Mutual Funds?

Mutual Funds are financial investment products second only to stocks in terms of size. Mutual funds are different from ETFs . Mutual funds are generally managed by fund managers and you usually need to buy them from investment companies, while ETFs are tradable funds similar to stocks and can be traded by you using any broker .

Mutual funds are funds that are raised based on trust in investment institutions and are often subject to strict supervision. Overall, they are relatively low risk and are favored by most conservative investors. They are also a reasonable choice for beginners in investment. What do you need to know about mutual funds?

What are Mutual Funds?

Mutual funds are financial investment products that are issued by the fund company based on the professional knowledge of the fund manager and his credible professional team, and publicly raise funds from social investors. The funds are then invested in the securities market to invest in stocks, bonds, commercial paper or financial derivatives to obtain interest, dividends and capital gains.

Mutual funds are managed by professional financial practitioners, also known as fund managers. Since mutual funds are investments made by the public out of trust in financial institutions, there is a possibility of deliberate fraud, so governments around the world implement strict management of mutual funds.

The United States is the most stringent country, and the establishment, information disclosure, trading, capital structure changes and dissolution of mutual funds are all subject to strict legal control.

What types of mutual funds are there?

Depending on the type of securities invested in the portfolio, mutual funds mainly include: stock funds, bond funds, money market funds, balanced funds, index funds, and other types of funds.

1. Equity Funds

Equity funds invest in a range of listed company stocks. Currently, the vast majority of mutual funds on the market are equity funds in various industries or across industries. Equity funds tend to fluctuate with the stock market and, of course, have greater growth potential.

Depending on the type of stocks, stock funds can be divided into different categories.

According to company size

• Large-cap funds: listed companies with a market value of more than $10 billion;
• Mid-cap funds: listed companies with market capitalizations between $2 billion and $10 billion;
• Small-cap funds: listed companies with a market value between $300 million and $2 billion;

By industry or sector

Some investors may prefer to invest in stocks of companies in a specific field based on their own circumstances, such as oil and gas energy, healthcare, technology, etc.

Growth and value

• When investing in stocks that are believed to have above-average returns, such funds are called growth funds.
• When funds select stocks of companies that they believe are undervalued by the market, they are called value funds.

Different regions of investment

When investing in companies in countries other than the United States, it is called an international fund; when investing in companies in multiple countries including the United States, it is called a global fund; and when investing in companies in countries with smaller markets but good growth trends, it is called an emerging market fund.

2. Bond funds

Bonds have the characteristic of fixed income, so bond funds are also fixed income mutual funds. They are the second largest mutual fund in the market after stock funds and are the most popular fund type for conservative investors.

These funds invest in government and corporate debt, and offer stable returns but not as much growth potential as stock funds.

3. Money market funds

These funds invest in short-term debt such as U.S. Treasury bills and commercial paper. Like bond funds, they are low-risk funds and currently account for about 15% of the fund market. These funds will not provide a very high rate of return, but are usually higher than bank deposit interest.

4. Balanced funds

Balanced funds are also called asset allocation funds, which invest in mixed assets, including stocks, bonds, money markets or other investment objects. The main purpose is to reduce risk by diversifying investments across categories. They can be divided into dynamic ratio and fixed ratio based on whether the proportion of investment objects is fixed or not.

• Dynamic ratio : It means that investors will reserve a certain floating ratio for each investment object, and then adjust the ratio at any time according to market conditions to obtain higher returns. Of course, the risk will also change accordingly.
• Fixed ratio : The ratio of each category in the investment object is always fixed, such as investing in 60% stocks and 40% bonds. The target date fund that retirees are most familiar with in this type of fund is that this type of fund automatically reallocates the investment ratio when the investor is approaching retirement, increasing the bond ratio to increase the security of retirement funds.

5. Index Funds

The fund managers of this type of fund will buy stocks that correspond to major market indices such as the S&P 500 or the Dow Jones Industrial Average. They are passive investment strategy funds, and because they do not pay the fees to the manager during active management, their returns are often better than those of active investment strategy funds. Similar to stock funds, they will also vary depending on the size of the company and industry of the investment target.

6. Other funds

In addition to these popular funds, there are now socially responsible funds (which invest only in companies that meet certain codes or belief standards), specialty funds (including real estate investment trusts, etc.) and even funds of funds (mutual funds that invest in other mutual funds).

What are the characteristics of mutual funds?

1. Diversification of investment targets

Mutual funds have no specific investment targets, allowing fund managers to mix investments within the portfolio to increase portfolio returns while reducing risk.

Mutual funds are diversified in that a portfolio can own hundreds of different equity securities in different sectors and industries as well as bonds of varying maturities and issuers.

Buying mutual funds can diversify your investments more cheaply and quickly than buying individual securities.

2. Easy to invest

Mutual funds can be bought and sold relatively easily on major stock exchanges, making them highly liquid financial investments. Common brokerages include Charles Schwab, E-Trade Financial, TD Ameritrade, etc.

In addition, for certain specialized asset classes, such as foreign stocks or unpopular derivatives, mutual funds are often the most viable way for individual investors to participate, and sometimes the only way.

3. Low-cost large-scale investment

Investors incur significant transaction fees when purchasing multiple securities individually, and pay significant commissions when creating a diversified portfolio on their own, which results in a significant loss of the initial investment amount.

If an investor only has $100 or $200, that’s usually not enough to buy a lot of stocks. So mutual funds allow investors to buy a variety of investment products with a smaller amount of money.

This is because mutual funds buy and sell large quantities of securities at a time, which makes their transaction costs lower than the fees an individual would pay when trading securities.

4. Assets are professionally managed

One of the main advantages of mutual funds is that investors do not have to pick underlying assets and manage investments, but rather very professional investment managers handle everything through careful research and skilled trading.

For smaller investors, they often don’t have the time or expertise to manage their own portfolios or have access to the same kind of information that professional funds have access to.

As a result, mutual funds have become a low-cost but very professional investment management assistance.

5. Transactions are highly regulated

Mutual funds are financed based on investors’ recognition of the credibility of the institution, and as a result, the funds are subject to what is arguably the most stringent regulation and control in the financial industry to ensure fairness and protection for investors.

6. Diversity of fees in the transaction process

The entry fee for mutual funds is not high, but there are many types of fees involved in the transaction process, and these fees are also a criterion for investors when choosing a fund company.

What are the mutual fund fees?

The various non-investment expenses during the investment process are investment costs. In mutual fund investment, there are mainly two types of expenses:

• Annual fund operating expenses
• Shareholder Fees

There is no industry standard value for these two fees. The proportions will vary among different fund companies, and the differences in fee structures will directly affect the final investment returns.

A. Annual Fund Operating Expenses

Annual fund operating expenses in English is Annual fund operating expenses.

This part of the cost is necessary and will continue to exist as the investment progresses. It mainly includes management fees, 12b-1 fees and other fees.

This fee accounts for about 0.25% to 1.5% of the total fund investment each year. ETFs, which are similar to mutual funds, charge much lower fees in this regard, usually fluctuating around 0.25%.

Management fees

Paid to fund managers and investment advisors for managing and operating their investment accounts.

12b-1 Fees

It is the annual marketing and distribution operating expense of a mutual fund, capped at 1%.

Other expenses

Including custody fees, legal-related fees, accounting fees, transfer agency fees and other administrative fees during the investment process.

B. Shareholder fees

It mainly includes sales fees, redemption fees, exchange fees, account fees and purchase fees, which are one-time fees paid in the process of buying or selling fund shares.

Sales loads

The commission paid to the broker when buying or selling fund shares is also called load. It can be divided into “front-end load” and “back-end load” according to the time of payment.

The front-end load is paid when buying stocks. This fee will occupy the investor’s investment funds. For example, if an investor wants to invest $1,000 to buy stocks, and the front-end load is $10, then the investor actually only buys $990 of stocks.

The back-end load is the fee paid when the stock is sold.

Some funds and brokers agree not to charge investors sales loads; these funds are called “no-load funds.”

Redemption fee

Fund companies may charge redemption fees if investors sell shares within a short period of time after purchasing them. According to FINRA, this period of time can include “anywhere from a few days to more than a year,” depending on the fund company’s contract details.

Exchange fee

The fund company charges investors this fee when they exchange or transfer shares into another fund offered by the same investment company.

Account fee

If the fund company sets a minimum account balance for investors, the investor will need to pay this account fee when the balance falls below this specified value.

Purchase fee

A fee paid to the fund company when you purchase fund shares, as distinguished from the sales load fee paid to your broker.

How do mutual funds work?

When investors want to invest but don’t know how to invest, don’t understand the tricks, and don’t have enough money to try multiple fields, they will pool their funds into a trusted company called a mutual fund and obtain shares of that company.

The fund company will then invest in various fields on behalf of investors. Depending on the amount of funds raised, it can make various combinations of investments such as long-term, short-term, single-industry and cross-industry. The profits obtained will then be paid to investors in the form of distributions. Investors can also sell their shares back to the company and redeem their investments when they want to stop trading.

In this process, investors are spared the tedious professional operations of data analysis, value comparison, etc. required for self-investment, as well as some of the risks and transaction expenses of independent investment.

A fund company is an actual company. Unlike companies in other industries, its operating business is financial investment.

After investors invest money to purchase, they obtain partial ownership of the company and its assets and become shareholders. Shareholders elect the CEO, who is also the fund manager, and the fund manager is obligated to work in the best interests of all shareholders.

Most mutual funds are part of a larger investment company, such as Fidelity Investments, The Vanguard Group, etc., which manage dozens or even hundreds of independent mutual funds.

How risky are mutual funds?

The strictest supervision does not mean a 100% return; there are also many risks in the fund trading process.

Uncertain returns

Every investment carries risk, and mutual funds can lose value. Fund shares are also subject to market fluctuations. Also, it is important to note that money funds are not like bank funds, and these funds are not insured by the FDIC – Federal Deposit Insurance Corporation for mutual fund shares.

Cash drag

This is mainly reflected in open-end funds. People are investing and withdrawing money into and from funds every day, so most investment portfolios must retain a certain amount of cash to meet daily stock redemptions. This cash has no income, so this situation is called “cash drag.”

High cost

Mutual funds provide investors with extremely professional management, but this requires fees. As mentioned above, there are various fees in the transaction process. Some of these fees directly reduce the actual investment amount, and some reduce the return on investment. In any case, they are all the cost of mutual fund investment and are borne by investors.

When mutual funds don’t perform well, these costs can make a seemingly profitable investment turn into a loss-making one.

Lack of liquidity

Mutual funds allow investors to request that their shares be converted into cash at any time. However, unlike stocks that trade throughout the day, redemptions from many mutual funds are only made at the end of each trading day, which results in certain liquidity restrictions on funds.

Inaccurate evaluation data

With mutual funds, it can be difficult to accurately research and compare investment returns.

Mutual fund net asset values ​​can provide some basic data analysis, but given the diversity of portfolios, it is difficult to make accurate comparisons even among funds with similar names or stated objectives.

Only index funds that consistently track the same market are truly comparable.

How are mutual funds traded?

In the past, mutual funds could only be bought and sold through financial professionals, but with the development of online trading platforms, investors are now allowed to trade mutual funds online themselves.

When deciding to start investing in mutual funds, investors can choose to buy directly on the fund company’s website or through a third-party trading platform.

Fund companies

This is the most direct and relatively cost-effective way of trading, but may be limited in the number of fund investment objects.

Investors access the fund company’s trading website, open a personal account, transfer funds, and purchase target funds based on the fund analysis provided by the fund company to obtain company equity.

Most fund companies, such as American Century and Dodge & Cox , only allow investors to purchase their own fund products, but some companies, such as Vanguard Group and Fidelity Investments , currently support investors to purchase other companies’ fund products or ETF products through them after paying some fees.

Third-party trading platform

This is a common and traditional investment method. Trading on a third-party trading platform not only allows investors to invest in a variety of financial investment products other than mutual funds, but also allows them to obtain more investment data analysis to keep up with market trends and make reasonable asset allocations. However, such operations will incur high costs, including transaction fees and commissions.

Investors open an online account on a third-party trading platform, transfer funds, and then purchase products offered by the platform.

How to profit from mutual funds?

Investors, that is, shareholders of fund companies, can get returns in three ways after investing in equity:

Dividend

Investors receive dividends from the fund’s shares and interest from bonds held in the fund’s portfolio. The fund pays out nearly all of the income it receives during the year to investors in the form of distributions. The fund gives investors a check for the income or allows investors to reinvest the income to get more shares.

Capital Gain

If the fund sells securities that have appreciated in price, it will realize capital gains, which the fund company will pay out to investors in the form of distributions.

Net Asset Value

If the prices of the securities that the fund invests in rise but the fund manager does not sell, the price of the corresponding fund shares, also known as the net asset value, will rise. Investors can then sell their mutual fund shares to make a profit.

Introduction to Several US Mutual Funds

Federated Hermes Corp Bond Strategy Port (FCSPX)

This mutual fund invests primarily in a diversified portfolio of fixed income securities of large corporations.

As of May 31, 2021, the one-year yield was 6.28%, the three-year yield was 8.38%, the five-year yield was 6.39%, and the ten-year yield was 5.64%.

Fidelity Select Medical Technology & Devices Portfolio (FSMEX)

The fund tracks the MSCI U.S. IMI Healthcare Equipment and Supplies 25/50 Index, which is modified to reflect the performance of companies in the sector. The fund is intended for investors seeking exposure to a specific sector. An initial investment of $2,500 is required

The return rate in the past year was 35.35%, the return rate in the past three years was 22.41%, the return rate in the past five years was 22.16%, and the return rate in the past ten years was 18.28%.

Putnam Global Technology Fund (PGTAX)

The fund invests primarily in common stocks of large and medium-sized global companies that the fund manager believes have good investment potential, mainly growth stocks or value stocks or both. Generally, at least 80% of the fund’s net assets will be invested in securities of companies in the technology industry. The fund is non-diversified.

The fund’s returns over the past year were 90.21%, 31.39% over the past three years, 32.12% over the past five years, and 20.45% over the past decade.

Bridge Builder Large Cap Value Fund (BBVLX)

The investment seeks to provide capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in securities and other instruments of large capitalization companies. It may also invest in American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs).

The fund’s return over the past year was 65.43%, over the past three years it was 14.00%, and over the past five years it was 13.70%.

PIMCO Long-Term Credit Bond Fund (PTCIX)

The investment seeks a total return that exceeds its benchmark, consistent with capital preservation and prudent investment management. The fund normally invests at least 80% of its assets in fixed income instruments of varying maturities, which may be represented by forwards or derivatives, such as options, futures contracts.

The fund has returned 9.84% over the past year, 7.86% over the past three years, 7.63% over the past five years and 8.44% over the past ten years.

Holbrook Income Fund

This is a short-term fund.

The fund seeks to provide immediate income with a secondary objective of preserving principal in a rising interest rate environment. The fund normally invests at least 80% of its net assets in a diversified portfolio of fixed income instruments.

It allocates up to 100% of its portfolio to fixed-income securities, either through direct investments or through the purchase of closed-end mutual funds and ETFs that invest primarily in income-producing securities. The manager may also allocate up to 50% of the fund’s assets into the common and preferred stocks of the underlying funds.

The fund has returned 32.41% over the past year and 6.46% over the past three years.

The Difference Between Mutual Funds and Hedge Funds

Mutual funds and hedge funds are often confused, but there are some clear differences between them:

1. Different investor qualification requirements

Mutual Funds

Mutual funds generally do not have specific investor capital requirements, but a few funds may have certain minimum capital requirements.

Hedge Funds

There are strict qualification restrictions for hedge fund investors. The U.S. Securities Act stipulates that if participating as an individual, the individual’s annual income in the past two years must be at least US$200,000; if participating as a family, the couple’s income in the past two years must be at least US$300,000; if participating as an institution, the net assets must be at least US$1 million.

2. Different investment operations

Mutual Funds

The actual investment operation of mutual funds is subject to many restrictions and supervision, which makes them more secure than some investment products and more suitable for novice investors.

Hedge Funds

Hedge funds have no restrictions on operations, and their investment portfolios and transactions are rarely restricted. Major partners and managers can freely and flexibly use various investment techniques, including short selling, derivative trading, and leverage. This has caused them to lose their original hedging function and instead become extremely risky.

3. Different levels of supervision

Mutual Funds

It is subject to relatively strict supervision because most investors are ordinary people, many of whom lack the necessary understanding of the market. Strict supervision is implemented in order to avoid public risks, protect the weak and ensure social security.

Hedge Funds

Hedge funds are currently unregulated. The US Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940 stipulated that institutions with less than 100 investors do not need to register with the US Securities and Exchange Commission and other financial regulatory authorities when they are established, and are exempt from regulation. This is because investors are mainly a small number of very sophisticated and wealthy individuals with strong self-protection capabilities.

4. Different funding methods

Mutual Funds

Mutual funds need to raise funds through public subscription. Fund companies will advertise to the public and promote their credibility in order to raise funds.

Hedge Funds

Generally, it is initiated through private placement, and the securities law stipulates that it cannot use any media to advertise when attracting customers. Investors mainly participate in four ways: through obtaining so-called “reliable investment information” in the upper class, directly knowing the manager of a hedge fund, through transfers from other funds, and through investment banks.

5. Whether offshore establishment is possible has different requirements

Mutual Funds

Cannot be established offshore.

Hedge Funds

Offshore funds can be established to avoid investment restrictions and tax requirements under U.S. law.

They are often set up in tax havens such as the Virgin Islands, the Bahamas, Bermuda, Cayman Island, Dublin, and Luxembourg, where taxation is minimal.

Frequently asked questions

Question 1: How do you say mutual fund in English?

Mutual funds are financial investment products that are based on the professional knowledge of fund managers and their credible professional team. They are issued by the fund company where they are located, raise funds publicly from social investors, and then invest in the securities market to invest in stocks, bonds, commercial papers or financial derivatives to obtain interest, dividends and capital gains.

Question 2: What are the types of mutual funds?

Depending on the type of securities invested in the portfolio, mutual funds mainly include: stock funds, bond funds, money market funds, balanced funds, index funds, and other types of funds.

Question 3: What are the fees for mutual funds?

The various non-investment expenses incurred by mutual funds during the investment process are investment costs. In mutual fund investments, there are mainly two types of expenses: annual fund operating expenses and shareholder expenses.

Question 4: How are mutual funds traded?

Investors can choose to purchase directly on the fund company’s website or on a third-party trading platform. The current mainstream third-party trading platforms include: Interactive Broker, TD Ameritrade, Charles Schwab, and E*TRADE.