The United States Securities and Exchange Commission defines a mutual fund as a type of investment company that pools money from many investors and invests the money in stocks, bonds, money-market instruments, other securities or even cash. There are different types of funds including stock funds, money markets, index funds and bond funds.
Characteristics of a mutual fund
- Investors are not allowed to buy stocks from a secondary market e.g. Nasdaq stock market or the New York stock market. They can only buy from the fund itself even through a broker if they so wish.
- Mutual fund share holders can resale their shares to the mutual fund. The shares will be redeemed at their current net asset value. The share holder will also incur any other extra charges the fund has placed at the time like the redemption fees or the deferred sales loads.
- A mutual fund sales its shares at any time. Its selling ability is limited only by the level of the assets under its management.
In the United States, there are different kinds of mutual funds including the open-end, closed end and unit investment trust. They are further categorised according to their principal investment. Fixed or bond income funds, hybrid funds, money market funds and stock or equity funds.
In the United States, the is normally overseen by a board of directors and registered with the Securities and Exchange Commission. The mutual fund may be overseen by a board of trustees if it is not organised as a corporation but as a trust. The fund manager is responsible for the buying and selling of the fund’s assets according to the fund’s laid out objectives.
The government does not tax the income and profits generated by the running of mutual funds. The mutual funds have to comply by the regulations stipulated in the United States Internal Revenue Code. The code requires mutual funds to distribute the greatest part of their capital and income gains to investors every year. The highest percentage of the income generated must be from investing in currencies and securities. The mutual funds have to control the ownership of voting securities and also diversify their investment ideas.
Depending on the investment objectives, permitted investments and investment approach, the mutual fund can invest in different kinds of securities. There are various advantages to investing directly to mutual funds instead of the traditional direct investment in individual securities. The advantages include:
- Convenient and better services
The fund provides the option of a purely investment instrument without any other additional services
- Daily liquidity
- Investment with larger investors
- Government oversight
The government requires a fund to come up with a prospectus describing the fund. Apart from that the US government does not oversee the eventuality of success or failure of the mutual fund.
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The New York Times
US Securities and Exchange Commission