Archive for the ‘Mutual Funds’ Category

What Are Mutual Funds and Different Types of Mutual Funds

Tuesday, January 19th, 2016

Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities. There is no such accurate definition of mutual funds, however the term is most commonly used for collective investment schemes that are regulated and available to the general public and open-ended in nature. Hedge funds are not considered as any type of mutual funds.

Mutual funds are identified by their principal investments. They are the 4th largest category of funds that are also known as money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds are also categorized as index based or actively managed.

In a mutual fund, investors pay the fund’s expenditure. There is some element of doubt in these expenses. A single mutual fund may give investors a choice of various combinations of these expenses by offering various different types of share combinations.

The fund manager is also known as the fund sponsor or fund management company. The buying and selling of the fund’s investments in accordance with the fund’s investment is the objective. A fund manager has to be a registered investment advisor. The same fund manager manages the funds and has the same brand name which is also known as a ‘fund family’ or ‘fund complex’.

As long as mutual comply with requirements that are established in the internal revenue code, they will not be taxed on their income. Clearly, they must expand their investments, limit the ownership of voting securities, disperse most of their income to their investors annually and earn most of their income by investing in securities and currencies.

Mutual funds can pass taxable income to their investors every year. The type of income that they earn remains unchanged as it gets transferred to the shareholders. For e.g., mutual fund distributors of dividend income are described as dividend income by the investor. There is an exception: net losses that are incurred by a mutual fund are not distributed or passed through fund investors.

Mutual funds invest in various kinds of securities. The various types of securities that a particular fund may invest in are mentioned in the fund’s prospectus, which explain the fund’s investment’s objective, its approach and the permitted investments. The objective of the investment describes the kind of income that the fund is looking for. For e.g., a “capital appreciation” fund generally looks to earn most of its returns from the increase in prices of the securities it holds rather than from a dividend or the interest income. The approach of the investment describes the criteria that the fund manager may have used to select the investments for the fund.

The investment portfolio of a mutual fund’s investment is continuously monitored by the fund’s portfolio manager or managers who are either employed by the funds manager or the sponsor.

Advantages of Mutual funds are:

1) Increase in diversification.

2) Liquidity on a daily basis.

3) Professional investment management.

4) Capacity to participate in investments that may be available only for larger investors.

5) Convenience as well as service.

6) Government oversight.

7) Easier comparison

like its advantages, the Mutual funds have disadvantages too. Here are some of them:

1) High fees.

2) Less control over timing of recognition of gains.

3) Much lesser predictable income.

4) No opportunity for customization.

There are different types of Mutual funds as well. Here are some of them.

Open-end funds

In open-end mutual funds, one must be willing to buy back their shares from investors at the end of every business day at the net asset value that is calculated for that day. Most of the open-end funds also sell shares to the public on every business day. These shares are also priced at a particular net asset value. A professional investment manager will oversee the portfolio, while buying or selling securities whichever is appropriate. The total investment in the funds will be variably based on share buying, share redemptions and fluctuation in the market variation. There are also no legal limits on the number of shares that can be issued.

Close-end funds

Close-end funds generally issue shares to the public just once, when they are created via an initial public offering. These shares are then listed for trading on a stock exchange. Investors, who don’t wish any longer to invest in the funds, cannot sell their shares back to the funds. Instead, they must sell their shares to another investor in the market as the price they may receive may be hugely different from its net asset value. It may be at a premium to net asset value (higher than the net asset value) or more commonly at a lesser to net asset value (lower than the net asset value). A professional investment manager will oversee the portfolio, in buying or selling securities whichever is appropriate.

Unit Investment Trusts

UIT or Unit Investment Trusts issue shares to the public just once when they are created. The investors in turn can cash in on the shares directly with the fund or they may also sell their shares in the market. UIT’s do not have any professional investment managers. Their portfolio of securities is established by the creation of the UIT’s and does not undergo any changes. UIT’s in general have a limited life span, which is limited at their creation.

Mutual Fund Management and Estate Planning Education

Saturday, October 31st, 2015

Estate planning courses can train you to understand how to measure mutual fund growth and performance. It can be complicated to handle estate planning, especially when you are uncertain about the best ways to take full advantage of the estate’s value. An estate planning education can show you how to reduce expenses and handle wills, trusts, and other important legal documents. It’s important to understand mutual funds and their performance as it is a part of an estate.

For example, it is commonly understood by fund advisory services, that past performance is not necessarily indicative of future returns. If you are going to be handling an estate, you must understand the funds involved with the estate. It’s important to know that most fund ratings are based primarily on past performance. As you may also learn in estate planning courses, the evidence of predictive value in fund ratings is uneven.

However, some conflicting research has been found regarding mutual fund performance. A number of studies have found that funds that have performed well in the past tend to continue to perform relatively well, with some reservations. Past performance may be useful in selecting the better performers among, say, large-cap growth funds. Of course, the ratings primarily reflect the recent relative performance of the funds, so it is difficult to see any need to transform recent fund performance into a rating system. The transformation may create a salable proprietary product, but it does not necessarily improve the usefulness of the information delivered to investors. Some research suggests that investors would be as well served with simple past performance comparisons as with formal ratings.

An estate planning education will prepare you for the research and work it takes to manage mutual funds and trusts in estate planning. As an advisor or an estate planner, one aspect you will be responsible for understanding is fund evaluation. Estate planning courses can usually explain how fund evaluation models work. The fact that most fund ratings emphasize performance relative to a peer group of funds is the most significant weakness of most fund evaluation models. Every investor would not necessarily have (or want) access to the peer group funds that a fund evaluation service selects for its comparisons. Furthermore, it is usually possible to invest in an asset class or category without using any of the funds in a mutual fund peer group. ETFs and structured notes are alternative vehicles, for example. Even if comprehensive fund peer group ratings are sometimes useful to investors, the appropriate way to evaluate a fund varies as costs, fund holdings, fund structures and investors’ objectives change.

To illustrate how an adviser might develop and use detailed fund information effectively, consider how to enhance an investor’s or an adviser’s understanding of the elements of fund performance. Even if a fund-rating calculation considers a fund’s ability to do better than its peers during the most recent bear market, the performance measurement that dominates most ratings is a single performance number for each fund for each year or quarter. A breakdown of how and why the performance of the fund was achieved in that period is a better guide to what the future might hold for that fund than a simple historic return calculation or a longer-term comparison of returns among a group of funds.

For example, good performance achieved by consistent implementation of a stock valuation strategy with patient trading is likely to be more sustainable than performance achieved by a single major allocation shift or by moving from equities to cash and back again in an attempt to predict market direction. It is essential to look beyond ratings and rankings and into the manager’s actions for better ways to identify funds with superior investment processes and prospects and to develop comprehensive information that will improve fund choices.

Estate planning courses will illustrate a few points about fund managers: 1- active fund manager “value-add” is obscured by combining good results for true active managers with poor results from closet indexers who are charging active management fees to their investors but not delivering value, 2- The ability of fund managers to value securities and make performance-enhancing portfolio transactions can be obscured and overwhelmed by flows of investor funds into and out of mutual funds, 3- Portfolio transaction costs for funds exceed the fund’s expense ratio on average, but funds add value with some of their discretionary transactions. Transactions made to accommodate investor flow into and out of a fund and transactions larger than the average trade size in comparable competitive funds will hurt performance, and 4- Managers with superior stock selection skills can be identified and their skills persist over time. Past performance may not be a reliable indicator of future results, but it is not meaningless.

Overall, it’s important to know that an estate planning education can fully prepare you for a successful career as a manager. You will feel confident in your abilities to manage many funds, trusts, and mutual funds with ease. Estate planning courses can help you learn useful information about the financial and legal aspect of the responsibilities you may face. You will develop the skills necessary to efficiently overcome any obstacles that may be in the way of a very successful career and future.