What Is a Mutual Fund?
What Is a Mutual Fund Company?
A mutual fund is a special type of company that pools money together from shareholders, hires a professional investor to oversee the portfolio, and invests the funds according to some strategy or style such as a mutual fund that specializes in buying shares of "sin" stocks in the gambling, alcohol, and tobacco industries or a mutual fund that invests in foreign bonds.
Every mutual fund is required by law to have an independent board of directors responsible for hiring or firing the fund manager. These directors have a duty to act in the best interest of the shareholders of the fund. As a result, many investors, even some otherwise knowledgable investors, do not understand that there is the mutual fund company, which is the fund itself, and a separate money management company that signs a contract in exchange for a fee (typically between 0.50% and 2.00% of net worth per year).
What Is a Mutual Fund Expense Ratio?
the percentage of the fund's net worth (net assets) each year that goes to paying fees to the portfolio manager, expenses such as commissions to stock brokers, custody fees to banks, service charges to a transfer agent to handle the mechanics of shareholder statements and orders, legal costs, etc.
What Is a Mutual Fund Sales Load?
commission paid to the person or institution selling you the mutual fund. In 99% of cases, you should avoid investing in a mutual fund that has a sales load because it is a pure expense that comes right out of your pocket. For example, if you have $100,000 to invest and you put it all in a fund with a 5% sales load, you would only have $95,000 invested the moment after you signed the paperwork. If the fund grew 10% annually, over 40 years, that $5,000 you gave up would have resulted in you being $226,300 poorer than you would have been by investing in a comparable no-load fund.
What Is a Mutual Fund Prospectus?
special document that a mutual fund company is required to provide to existing and potential shareholders that details how the fund expects to invest money, the expenses the fund expects to incur, information on the portfolio managers, and much more. You should never invest in a mutual fund without reading the entire prospectus.
What Is a Mutual Fund Statement of Additional Information?
A mutual fund statement of additional information, often called a mutual fund SAI document, includes more information that might be useful to a potential investor that is not found in the prospectus. This can include a detailed breakdown of investing strategies, disclosures about how much money portfolio managers have invested in the funds they manage, and a host of other important data that would be difficult to find elsewhere.
What Is a Mutual Fund Compared to an ETF or an Index Fund?
Exchange traded funds (ETFs) and index funds are types of mutual funds, just like a Ford or a Mercedes is a type of automobile.
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