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• Thursday, 23 May 2013

Mutual Funds

Mutual Funds are one of the most popular investment vehicles available to large and small investors today. Mutual funds provide an appealing combination of specific market focus, skilled active management and reduced risk compared to individual stock investing. It’s no wonder many small individual investors, often with the advice of their financial advisor, choose a varied portfolio of mutual funds as the stock quotient of their retirement funds. Mutual funds are a form of collective investment, in that money invested by a large pool of investors is deployed by a dedicated Fund Manager towards purchasing a select group of stocks and/or other related securities.

The resulting mutual funds may have a wide or narrow focus, and as examples we can suppose a mythical “North American Fund” and an “Asian Telecoms Fund”, respectively. It is up to the fund manager to actively manage the fund in an effort to maximize performance, and some managers have become “superstars” as a result of their records managing mutual funds to a string of impressive annual returns. Of course, these star managers are handsomely rewarded for their efforts and their compensation, as well as that paid to even mediocre fund managers, is charged to individual mutual fund investors in the form of annual and purchase fees. The majority of mutual funds are so-called Equity Funds that are focused on the stock market, but there are also Balanced Funds which typically invest in bonds in order to reduce risk. Among pure equity funds, Growth Funds target promising new companies, Income Funds comprise larger, dividend-issuing companies, and Value Funds rely on the instincts of the fund manager to seek out stocks perceived to be undervalued.

Mutual funds have been around for nearly a century. In 1924, Massachusetts Investors Trust became the first American mutual fund. By the 1950s, investors had well over 100 different mutual funds to choose from. Today the thriving mutual fund industry boasts over 8,500 mutual funds with Investment Company Institute (“ICI”) membership totaling over $9 trillion in assets.