Mutual Funds: Mutual funds are a type of investments where investors and shareholders can invest their money into an investment which is managed by professionals working in the financial sector. These investments are fueled by cash, bonds, stocks and other assets. A mutual fund can also be addressed as a portfolio.
The concept of mutual funds came into existence during the 19th century Europe, specifically in the United Kingdom. It started as a foreign and colonial investment trust initiated by Robert Fleming in1968 to efficiently manage the finances of the financially affluent people in Scotland by spreading the investment through investing in different stocks. Following the example of Great Britain, The United States of America also started using the concept of mutual funds and developed the newer close-ended mutual funds. They started the industry through an open-ended mutual fund which was the Massachusetts investor’s trust. (Thune, n.d.)
There was substantial growth noticed in the mutual fund industry in during the eighties and nineties during which there were a huge amount of investments in bonds, schemes, mutual funds and the number of shareholders. As a result of the great depression in 1929, the mutual fund industry was gravely affected and slowed down the growth of the mutual fund industry. This followed a stricter regulation of mutual funds and required the governments to pass acts to protect the interests of the investors. The investment Company institute was formed to work with the federal regulatory agency to get current knowledge of the mutual fund industry.
Due to these rigorous steps, the mutual fund industry grew with a heightened pace. This was reflected in the amount of total net assets which grew from USD 448 million in 1940 to USD 2.5 Billion by 1950. As a result of the catalysts actively increasing the growth of this industry rapid growth was witnessed after it. (McWhinney, n.d.)
Affordability: Investors with a low income can also invest in mutual funds by investing in low amounts which can grow into substantial amounts.
Diversification: The biggest advantage of mutual funds is the investment strategy of not relying on one source of investment and investing in different financial stocks and bonds. It is even convenient for investors as they don’t have to constantly monitor the stocks they have invested in.
Liquidity: Mutual Fund investors are equipped with the ability and freedom to redeem their investment back at the current rates which includes fees of redemption of funds. (U. S. Securities and Exchange Commission, 2008)
Lack of Control: When the investors pool their money into the mutual funds there is no liberty in the hands of the investors regarding where their money is invested and the investors cannot directly influence the preference of the investments by the firm.
Price Uncertainty: The advantages of single stocks are that an investor can monitor the progress of the funds and manage it manually according to his own preference. Stock prices change every hour and every second and buying and selling funds single handedly allows investor the benefit of time.
Costs in event of Negative Returns: If the funds perform positively or negatively, it doesn’t matter to the fact that they have to pay sales cost and annual fees regardless of the progress of the funds. (Nasdaq, n.d.)
United States of America heavily relies on investment funds for the growth of its financial sector and that is why there is a huge focus on the investment firms in America. Some of the best investment firms in the United States of America are the Bank of America Global Wealth and Investment Management, J P Morgan, Morgan Stanley, Goldman Sachs and the UBS Wealth management firm.
Recent trends in investment regarding mutual fund investments show preference towards dividend-paying blue chip stocks but due to the hiked interest rates investors channeled their investments to individual stocks. Due to the uncertainty of the market cycles in USA, investors brought variety into their portfolio by including international stocks to ensure favorable returns. (Kadlec, 2014)
A Mutual Fund is created under the leadership of an investment advisor or a principal distributor which favorably owns the fund. The responsibility of the sponsor is to organize the third parties for gathering the funds required to initiate the fund. The fund is supposed to be registered under the proper authorities according to laws. To be eligible to sell its shares to the people it has to register those shares under the Securities and Exchange Commission.
Mutual Funds involve the costs like fees and expenses in their ongoing operations. The common types of expenses include management fees, accounting expenses, transfer agent and other expenses incurred from paying government fees and servicing the shareholder accounts. Other costs which are charged from the investors are investment management fees, sales/agent commissions, fund administration expenses, transfer agent fees and fund management advisory fees. (Investment Company Institute, n.d.)
If I have AED 1000,000 in the form of idle cash, I would prefer to invest in mutual funds as I do not have the time to personally monitor stocks and manage them personally. I would put my faith in an acclaimed and successful mutual fund with above average returns. The fact that mutual investment firms invest the money further into different stocks chosen by the fund’s investment advisor which is an experienced person which tracks the trends of the stock market is a fact which I can rely on to invest my funds into a mutual fund. To be on the safe side I would divide my money into half and investment in two separate mutual funds and earn from its interest. This would be a benefit if one of the firms face adversities and I won’t lose all my money. There is also a benefit that I have the freedom of drawing back my investment whenever I want. This would ensure higher returns from a substantial investment in my opinion.
Investment Company Institute. (n.d.). How Mutual Funds and Investment Companies Operate. Retrieved July 15, 2014, from http://www.icifactbook.org/: http://www.icifactbook.org/2006/06_fb_appa.html
Kadlec, D. (2014, Jan 15). Top trends in mutual fund investing. Retrieved July 15, 2014, from http://www.cnbc.com/: http://www.cnbc.com/id/101323758
McWhinney, J. E. (n.d.). A Brief History Of The Mutual Fund. Retrieved July 15, 2014, from http://www.investopedia.com/: http://www.investopedia.com/articles/mutualfund/05/mfhistory.asp
Nasdaq. (n.d.). Disadvantages of Mutual Funds. Retrieved July 15, 2014, from http://www.nasdaq.com/: http://www.nasdaq.com/investing/disadvantages-of-mutual-funds.stm
Thune, K. (n.d.). What is a Mutual Fund? Retrieved July 15, 2014, from http://mutualfunds.about.com/: http://mutualfunds.about.com/od/mutualfundbasics/a/What-Is-A-Mutual-Fund.htm
U. S. Securities and Exchange Commission. (2008). Mutual Funds. Washington: Securites and Exchange Commision.