essay on mutual funds

• Guide to Mutual Funds

What are Mutual Funds and How to Invest in Them?

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What Is a Mutual Fund?

How mutual funds work.

• How Are Returns Calculated?

Types of Mutual Funds

How to invest in mutual funds, mutual fund fees, classes of mutual fund shares, how mutual fund shares are priced, pros and cons of mutual fund investing, evaluating mutual funds, mutual funds vs. index funds, mutual funds vs. etfs.

• Mutual Fund FAQs

The Bottom Line

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

• What are Mutual Funds and How to Invest in Them? CURRENT ARTICLE
• A Brief History of the Mutual Fund
• How to Choose the Best Mutual Fund
• Understanding the Mutual Fund Style Box
• Mutual Fund Custodian: Meaning and Examples
• Mutual Fund Yield
• Digging Deeper: The Mutual Fund Prospectus
• Money Market Funds: What They Are, How They Work, Pros and Cons
• 8 Best Funds for Regular Dividend Income
• Open-Ended Fund: Definition, Example, Pros and Cons
• Balanced Funds: Vanguard (VGSTX) vs. Fidelity (FBALX)
• Growth vs. Dividend Reinvestment: Which Is Better?
• REITs vs. Real Estate Mutual Funds: What's the Difference?
• Long/Short Fund: Meaning, Overview, Examples
• Pay Attention to Your Fund’s Expense Ratio
• No-Load Fund: Definition, How It Works, Benefits, and Examples
• How to Calculate the Cost Basis for Mutual Funds Over a Long Time Period
• How to Determine Mutual Fund Pricing
• NAV Return: Definition, Calculation, Vs. Market Return
• Understanding Taxes on Mutual Funds Dividends

Mutual funds are pooled investments managed by professional money managers. They trade on exchanges and provide an accessible way for investors to get access to a wide mix of assets that are selected for the fund.

A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities (according to the fund's stated strategy).

It allows individual investors to gain exposure to a professionally-managed portfolio and potentially benefit from economies of scale, while spreading risk across multiple investments.

Key Takeaways

• A mutual fund is a portfolio of stocks, bonds, or other securities purchased with the pooled capital of investors.
• Mutual funds give individual investors access to diversified, professionally managed portfolios.
• Mutual funds are known by the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
• Mutual funds charge annual fees, expense ratios, or commissions, which lower their overall returns.
• Many American workers put their retirement funds into mutual funds through employer-sponsored retirement plans, a form of "automatic investing" that builds wealth over the long-term with more limited investment risk than other asset choices.

Investopedia / Ellen Lindner

Mutual Funds: How Many is Too Many?

Mutual funds are defined as a portfolio of investments funded by all the investors who have purchased shares in the fund. So, when an individual buys shares in a mutual fund, they gain part-ownership of all the underlying assets the fund owns. The fund's performance depends on how its collective assets are doing. When these assets increase in value, so does the value of the fund's shares. Conversely, when the assets decrease in value, so does the value of the shares.

The mutual fund manager oversees the portfolio, deciding how to divide money across sectors, industries, companies, etc., based on the strategy of the fund. About half of the mutual funds held by American households are in index equity funds, which have portfolios that comprise and weigh the assets of indexes to mirror the S&P 500 or the Dow Jones Industrial Average (DJIA). The largest mutual funds are managed by Vanguard and Fidelity . They are also index funds. These generally have limited investment risk, unless the entirety of the market goes down. Nevertheless, over the long run, index funds tied to the market have gone up, helping to meet the investment objectives of many future retirees.

By 2023, over half of American households had investments in mutual funds, collectively owning 88% of all mutual fund assets. This marks a significant increase from just a few decades ago, when, in 1980, less than 6% of U.S. households were invested in mutual funds. Today, much of the retirement savings of middle-income Americans are tied up in these funds.

When setting aside money in mutual funds, households can access a broad range of investments, which can help cut their risk compared to investing in a single stock or bond. Investors earn returns based on the fund's performance minus any fees or expenses charged. Mutual funds are often the investment of choice for middle America, providing a broad swath of middle-income workers with professionally managed portfolios of equities, bonds, and other asset classes.

Most mutual funds are part of larger investment companies or fund families such as Fidelity Investments, Vanguard, T. Rowe Price, and Oppenheimer.

How Are Earnings Calculated for Mutual Funds?

Investors typically earn returns from a mutual fund in three ways:

• Dividend/interest income : Mutual funds distribute the dividends on stocks and interest on bonds held in its portfolio. Funds often give investors the choice of either receiving a check for distributions or reinvesting earnings for additional shares in the mutual fund.
• Portfolio distributions : If the fund sells securities that have increased in price, the fund realizes a capital gain , which most funds also pass on to investors in a distribution.
• Capital gains distribution : When the fund's shares increase in price, you can sell your mutual fund shares for a profit in the market.

When researching the returns of a mutual fund, you'll typically come upon a figure for the "total return," or the net change in value (either up or down) over a specific period. This includes any interest, dividends, or capital gains the fund has generated along with the change in its market value during a given period. In most cases, total returns are given for one, five, and 10-year periods, as well as from the day the fund opened or inception date.

There are many types among the more than 8,700 mutual funds in the U.S., with most in four main categories: stock, money market, bond, and target-date funds.

Stock Funds

As the name implies, this fund invests principally in equity or stocks. Within this group are assorted subcategories. Some equity funds are named for the size of the companies they invest in: firms with small-, mid-, or large-sized capitalization. Others are named by their investment approach: aggressive growth, income-oriented, and value. Equity funds are also categorized by whether they invest in U.S. stocks or foreign equities. To understand how these strategies and sizes of assets can combine, you can use an equity style box like the example below.

Value funds invest in stocks their managers see as undervalued while aiming at long-term appreciation when the market recognizes the stocks' true worth. These companies are characterized by low price-to-earnings (P/E) ratios, low price-to-book ratios, and dividend yields. Meanwhile, growth funds look to companies with solid earnings, sales, and cash flow growth. These companies typically have high P/E ratios and do not pay dividends. A compromise between strict value and growth investment is a "blend." These funds invest in a mix of growth and value stocks to give a risk-to-reward profile somewhere in the middle.

Large-cap companies have market capitalizations of over $10 billion. Market cap is derived by multiplying the share price by the number of shares outstanding. Large-cap stocks are typically for blue-chip firms whose names are recognizable. Small-cap stocks have a market cap between $250 million and $2 billion. These companies tend to be newer, riskier investments. Mid-cap stocks fill in the gap between small- and large-cap.

A mutual fund may combine different investment styles and company sizes. For example, a large-cap value fund might include in its portfolio large-cap companies that are in strong financial shape but have recently seen their share prices fall; these would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a small-cap growth fund that invests in startup technology companies with high growth prospects. This kind of fund is in the bottom right quadrant above (small and growth).

A mutual fund that generates a consistent and minimum return is part of the fixed-income category. These mutual funds focus on investments that pay a set rate of return, such as government bonds, corporate bonds, and other debt instruments. The bonds should generate interest income that's passed on to the shareholders, with limited investment risk.

There are also actively managed funds seeking relatively undervalued bonds to sell them at a profit. These mutual funds will likely pay higher returns but aren't without risk. For example, a fund specializing in high-yield junk bonds is much riskier than a fund that invests in government securities.

Because there are many different types of bonds, bond funds can vary dramatically depending on when and when they invest, and all bond funds are subject to risks related to changes in interest rates.

Index Mutual Funds

Index mutual funds are designed to replicate the performance of a specific index, such as the S&P 500 or the DJIA. This passive strategy requires less research from analysts and advisors, so fewer expenses are passed on to investors through fees, and these funds are designed with cost-sensitive investors in mind.

They also frequently outperform actively managed mutual funds and thus potentially are the rare combination in life of less cost and better performance.

Balanced Funds

Balanced funds invest across different securities, whether stocks, bonds, the money market , or alternative investments. The objective of these funds, known as an asset-allocation fund, is to cut risk through diversification.

Mutual funds detail their allocation strategies, so you know ahead of time what assets you're indirectly investing in. Some funds follow a strategy for dynamic allocation percentages to meet diverse investor objectives. This may include responding to market conditions, business cycle changes, or the changing phases of the investor's own life.

The portfolio manager is commonly given the freedom to switch the ratio of asset classes as needed to maintain the fund's stated strategy.

Money Market Mutual Funds

The money market consists of safe, risk-free, short-term debt instruments, mostly government Treasury bills. The returns on them aren't substantial. A typical return is a little more than the amount earned in a regular checking or savings account and a little less than the average certificate of deposit ( CD ). Money market mutual funds are often used as a temporary holding place for cash that will be used for future investments or for an emergency fund. While low risk, they aren't insured by the Federal Deposit Insurance Corporation (FDIC) like savings accounts or CDs.

Income Funds

Income funds are meant to disburse income on a steady basis, and are often seen as the mutual funds for retirement investing. They invest primarily in government and high-quality corporate debt, holding these bonds until maturity to provide interest streams. While fund holdings may rise in value, the primary goal is to offer a steady cash flow​ .

International Mutual Funds

An international mutual fund , or foreign fund, invests only in assets located outside an investor's home country. Global funds, however, can invest anywhere worldwide. Their volatility depends on where and when the funds are invested. However, these funds can be part of a well-balanced, diversified portfolio since the returns from abroad may provide a ballast against lower returns at home.

Regional Mutual Funds

Often international in scope, regional mutual funds are investment vehicles that focus on a specific geographic region, such as a country, a continent, or a group of countries with similar economic characteristics. These funds invest in stocks, bonds, or other securities of companies that are headquartered, or generate a significant part of their revenue, within a targeted region.

Examples of regional mutual funds include Europe-focused mutual funds that invest in that continent's securities; emerging market mutual funds, which focus on investments in developing economies worldwide; and Latin America-focused mutual funds that invest in countries like Brazil, Mexico, and Argentina.

The main advantage of regional mutual funds is that they allow investors to capitalize on the growth potential of specific geographic areas and diversify their portfolios internationally. However, these funds also carry unique risks, such as political instability, currency fluctuations, and economic uncertainties, though they depend on the region.

Sector and Theme Mutual Funds

Sector mutual funds aim to profit from the performance of specific sectors of the economy, such as finance, technology, or health care. Theme funds can cut across sectors. For example, a fund focused on AI might have holdings in firms in health care, defense, and other areas employing and building out AI beyond the tech industry. Sector or theme funds can have volatility from low to extreme, and their drawback is that in many sectors, stocks tend to rise and fall together.

Socially Responsible Mutual Funds

Socially responsible investing (SRI) or so-called ethical funds invest only in companies and sectors that meet preset criteria. For example, some socially responsible funds do not invest in industries like tobacco, alcoholic beverages, weapons, or nuclear power. Sustainable mutual funds invest primarily in green technology, such as solar and wind power or recycling.

There are also funds that review environmental, social, and governance (ESG) factors when choosing investments. This approach focuses on the company's management practices and whether they tend toward environmental and community improvement.

Investing in mutual funds is relatively straightforward and involves the following steps:

• Before buying shares, you should check with your employer if they offer additional mutual fund products since these might come with matching funds or are more beneficial tax-wise.
• Ensure you have a brokerage account with enough deposits and access to buy mutual fund shares .
• Identify mutual funds matching your investing goals for risk, returns, fees, and minimum investments. Many platforms offer fund screening and research tools.
• Determine how much you want to invest and submit your trade. If you choose, you can likely set up automatic recurring investments as desired.
• While these investments are most often for the long term, you should still check on how the fund is doing periodically, making adjustments as needed.
• When it's time to close your position, enter a sell order on your platform.

When investing in mutual funds, it's essential to understand the fees associated with them , as these costs will significantly affect your investment returns over time. Here are some common mutual fund fees:

Expense ratio : This is an annual fee that covers the fund's operating expenses, including management fees, administrative costs, and marketing expenses. The expense ratio is expressed as a percentage of the fund's average net assets and is deducted from the fund's returns. Pressured by competition from index investing and exchange-traded funds (ETFs), mutual funds have lowered the expense ratio by more than half over the last 30 years. In 1996, equity mutual fund investors incurred expense ratios of 1.04% ($1.04 for every $100 in assets). By 2022, that average had fallen to 0.44%, according to the Investment Company Institute. The fees for bond mutual funds were slightly less at 0.37%, and hybrid models, which often require more management, had expense fees averaging 0.59%.

Sales charges or loads : Some mutual funds charge sales fees, known as " loads ," when you buy or sell shares. Front-end loads are charged when you buy shares, while back-end loads (or contingent and deferred sales charges) are assessed if you sell your shares before a certain date. Sometimes, however, management firms offer no-load mutual funds , which don't have commission or sales charges.

Redemption fees : Some mutual funds charge a redemption fee when you sell shares within a short period (usually 30 to 180 days) after purchasing them, which the U.S. Securities and Exchange Commission (SEC) limits to 2%. This fee is designed to discourage short-term trading in these funds for stability.

Other account fees : Some funds or brokerage firms may charge extra fees for maintaining your account or transactions, especially if your balance falls below a certain minimum.

While many mutual funds are "no-load," you can frequently avoid brokerage fees and commissions anyway by purchasing a fund directly from the mutual fund company instead of going through an intermediary.

If you're trying to cut your fees, you'll want to watch the type of mutual fund shares you buy. Traditionally, individual investors would buy mutual funds with A-shares through a broker. Then, a front-end load of up to 5% or more, plus management fees and ongoing fees for distributions (also known as 12b-1 fees), would be tacked on. Financial advisors selling these products may encourage clients to buy higher-load offerings to generate commissions. With front-end funds, the investor pays for these expenses as they buy into the fund.

To remedy these problems and meet fiduciary-rule standards, investment companies have designated new share classes, including "level load" C shares, which generally don't have a front-end load but carry a 12b-1 annual distribution fee of up to 1%.

Funds that charge management and other fees when investors sell their holdings are classified as Class B shares.

The value of the mutual fund depends on the performance of the securities it invests in. When buying a unit or share of a mutual fund, you get a part of its portfolio value. Investing in a share of a mutual fund differs from investing in stock shares. Unlike stock, mutual fund shares do not give their holders voting rights. And unlike ETFs, you can't trade your shares throughout the trading day.

Mutual fund share prices come from the net asset value (NAV) per share, sometimes listed on platforms as NAVPS . A fund's NAV is derived by dividing the total value of the securities in the portfolio by the number of shares outstanding.

Mutual fund shares are typically bought or redeemed at the fund's NAV, which doesn't fluctuate during market hours but is settled at the end of each trading day. The price of a mutual fund is also updated when the NAVPS is settled.

There are many reasons that mutual funds have been the retail investor's vehicle of choice , with an overwhelming majority of money in employer-sponsored retirement plans invested in mutual funds. The SEC, in particular, has long paid very close attention to how these funds are run, given their importance to so many Americans and their retirements.

Mutual Fund Pros & Cons

Diversification.

Minimal investment requirements

Professional management

Variety of offerings

High fees, commissions, and other expenses

Large cash presence in portfolios

No FDIC coverage

Difficulty in comparing funds

Lack of transparency in holdings

Pros of Mutual Fund Investing

Diversification , or the mixing of investments and assets within a portfolio to reduce risk, is one of the advantages of investing in mutual funds. A diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers. A mutual fund can achieve diversification faster and more cheaply than buying individual securities.

Easy Access

Trading on the major stock exchanges, mutual funds can be bought and sold with relative ease, making them highly liquid investments. Also, for certain types of assets, like foreign equities or exotic commodities , mutual funds are often the most workable way—sometimes the only way—for individual investors to participate.

Economies of Scale

Mutual funds also provide economies of scale . Buying only one security at a time could lead to hefty transaction fees. Mutual funds also enable investors to take advantage of dollar-cost averaging, which is putting away a set amount periodically, no matter the changes in the market.

Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. A mutual fund can invest in certain assets or take larger positions than a smaller investor could.

Professional Management

A professional investment manager uses research and skillful trading. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. Mutual funds require much lower investment minimums, providing a low-cost way for individual investors to experience and benefit from professional money management.

Transparency

Mutual funds are subject to industry regulations meant to ensure accountability and fairness for investors. In addition, the component securities of each mutual fund can be found across many platforms.

You can research and choose from funds with different management styles and goals. A fund manager may focus on value investing, growth investing , developed markets, emerging markets, income, or macroeconomic investing, among many other styles. This variety enables investors to gain exposure not only to stocks and bonds but also to commodities, foreign assets, and real estate through specialized mutual funds. Mutual funds provide prospects for foreign and domestic investment that might otherwise be inaccessible.

Mutual fund managers are legally obligated to follow the fund's stated mandate and to work in the best interest of mutual fund shareholders.

Cons of Mutual Fund Investing

Liquidity, diversification, and professional management all make mutual funds attractive options. However, there are drawbacks:

No FDIC Guarantee

Like many other investments without a guaranteed return, there is always the possibility that the value of your mutual fund will depreciate . Equity mutual funds experience price fluctuations, along with the stocks in the fund's portfolio. The FDIC does not guarantee mutual fund investments.

Mutual funds require a significant part of their portfolios to be held in cash to satisfy share redemptions each day. To maintain liquidity and the ability to accommodate withdrawals, mutual funds typically have to keep a larger percentage of their portfolio as cash than other investors. Because this cash earns no return, it's called a "cash drag."

Higher Costs

Fees that reduce your overall payout from a mutual fund are assessed whatever the performance of the fund. Failing to pay attention to the fees can cost you since actively managed funds incur transaction costs that accumulate and compound year over year.

Dilution is also the result of a successful fund growing too big. When new money pours into funds with solid track records, the manager could have trouble finding suitable investments for all the new capital to be put to good use.

The SEC requires that funds have at least 80% of assets in the particular type of investment implied by their title. How the remaining assets are invested is up to the fund manager. However, the categories that qualify for 80% of the assets can be vague and wide-ranging. Some less scrupulous fund managers might manipulate prospective investors via their fund titles. For example, a fund that focuses narrowly on Argentine stocks could be sold with a much-more-ranging title like "International High-Tech Fund."

End-of-Day Trading Only

A mutual fund allows you to request that your shares be converted into cash at any time. However, unlike stocks and ETFs that trade throughout the day, mutual fund redemptions can only take place at the end of the trading day.

When the mutual fund manager sells a security, a capital-gains tax is triggered, which can be extended to you. ETFs, for example, avoid this through their creation and redemption mechanism. Your taxes can be lowered by investing in tax-sensitive funds or by holding non-tax-sensitive mutual funds in a tax-deferred account, such as a 401(k) or IRA .

Researching and comparing funds can be more difficult than for other securities. Unlike stocks, mutual funds do not offer investors the opportunity to juxtapose the price to earnings (P/E) ratio, sales growth, earnings per share (EPS), or other important data. A mutual fund's NAV can offer some basis for comparison, but given the diversity of portfolios, comparing the proverbial apples to apples can be difficult, even among funds with similar names or stated objectives. Only index funds tracking the same markets tend to be genuinely comparable.

Watch Out for "Diworsification"

" Diworsification "—a play on words that defines the concept—is an investment term for when too much complexity can lead to worse results. Many mutual fund investors tend to over-complicate matters. That is, they acquire too many funds that are too similar and, as a result, lose the benefits of diversification.

Example of a Mutual Fund

Among the most notable mutual funds is Fidelity Investments' Magellan Fund (FMAGX). Established in 1963, the fund had an investment objective of capital appreciation via investment in common stocks. The fund's height of success was between 1977 and 1990 when Peter Lynch served as its portfolio manager. Under Lynch's tenure, Magellan's assets under management increased from $18 million to $14 billion.

As of March 2024, Fidelity Magellan has about $33 billion in assets, managed by Sammy Simnegar since 2019. The S&P 500 is the fund's primary benchmark.

Index funds are mutual funds that aim to replicate the performance of a market benchmark or index. For example, an S&P 500 index fund tracks that index by holding the 500 companies in the same proportions. A key goal of index funds is minimizing costs to mirror their index closely.

By contrast, actively managed mutual funds try to beat the market by stock picking and shifting allocations. The fund manager seeks to achieve returns greater than a benchmark through their investing strategy and research.

Index funds offer market returns at lower costs, while active mutual funds aim for higher returns through skilled management that often comes at a higher price. When deciding between index or actively managed mutual fund investing, investors should consider costs, time horizons, and risk appetite.

Mutual funds and ETFs are pooled investment funds that offer investors a stake in a diversified portfolio. ​However, there are some crucial differences.

Among the most important is that ETF shares are traded on stock exchanges like regular stocks, while mutual fund shares are traded only once daily after markets close. This means ETFs can be traded anytime during market hours, offering more liquidity, flexibility, and real-time pricing. This flexibility means you can short sell them or engage in the many strategies you would use for stocks.

Another significant difference is pricing and valuation. ETF prices, like stocks, fluctuate throughout the day according to supply and demand. Meanwhile, mutual funds are priced only at the end of each trading day based on the NAV of the underlying portfolio. This also means that ETFs have the potential for larger premiums/discounts to NAV than mutual funds.

Compared with mutual funds , ETFs tend to have certain tax advantages and are often more cost-efficient.

Are Mutual Funds Safe Investments?

All investments involve some degree of risk when purchasing securities such as stocks, bonds, or mutual funds—and the actual risk of a particular mutual fund will depend on its investment strategy, holdings, and manager's competence. Unlike deposits at banks and credit unions, the money invested in mutual funds isn't FDIC or otherwise insured.

Can I Withdraw Money From a Mutual Fund Anytime?

Yes. Mutual funds are generally highly liquid investments, meaning you can redeem your shares on any business day. However, it's important to be aware of any potential fees or penalties associated with early withdrawals, such as redemption fees or short-term trading fees, which some funds impose to discourage people from trading in and out of the funds frequently.

Withdrawing funds may have tax implications, particularly if the investment has appreciated in value, which means you'll have to pay taxes on the capital gains.

Do You Actually Make Money in Mutual Funds?

Yes, many make money for retirement and other savings goals through capital gains distributions, dividends, and interest income. As securities in the mutual fund's portfolio increase in value, the value of the fund's shares typically rises, leading to capital gains. In addition, many mutual funds pay out dividends from the income the fund has earned by the securities they hold. If the fund holds bonds, then it will earn interest on them. However, returns are not guaranteed, and the performance of a mutual fund depends on market conditions, the fund's management, what assets it holds, and its investment strategy.

What Are the Risks of Mutual Funds?

Depending on the assets they hold, mutual funds carry several investment risks, including market, interest rate, and management risk . Market risk arises from the potential decline in the value of the securities within the fund. Interest rate risk affects funds holding bonds and other fixed-income securities, as rising interest rates can lead to a decrease in bond prices.

Management risk is linked to the performance of the fund's management team. You are putting your money in their hands, and poor investment decisions will negatively impact your returns. Before investing, it's important for investors to carefully review the fund's prospectus and consider their own risk tolerance and investment objectives.

What Is a Target Date Mutual Fund?

When investing in a 401(k) or other retirement savings account, target-date or life cycle funds are popular. Choosing a fund that builds toward your retirement, like a hypothetical FUND X 2050 (which would target a 2050 retirement year), means investing in a mutual fund that rebalances and automatically shifts its risk profile to a more conservative approach as the target date gets closer.

Mutual funds are versatile and accessible for those looking to diversify their portfolios. These funds pool money from investors for stocks, bonds, real estate, derivatives, and other securities—all managed for you. Key benefits include access to diversified, professionally managed portfolios and choosing among funds tailored to different objectives and risk tolerances. However, mutual funds come with fees and expenses, including annual fees, expense ratios, or commissions, that will help determine your overall returns.

Investors can choose from many types of mutual funds, such as stock, bond, money market, index, and target-date funds, each with its investment focus and strategy. The returns on mutual funds come from distributions of income from dividends or interest and selling fund securities at a profit.

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My dissertation comprises of three essays on mutual funds. In the first essay, I test whether fund investors rationally incorporate portfolio manager ownership disclosure in their portfolio allocation decisions. Using a natural experiment, regulations that mandate portfolio manager ownership disclosure, I find that investor flows respond to higher percentage ownership. The relationship between investor flows and percentage ownership is persistent well after the regulatory change in 2005, suggesting that the investor responses are permanent rather than transient and are robust to several controls as well as unobserved heterogeneity reflected in fund family and manager fixed-effects. The investor responses to ownership are rational, as investors investing in higher percentage ownership funds are rewarded back in terms of higher risk-adjusted performance. Finally, I shed light on the channels through which higher ownership translates into better investor rewards. I show that agency alleviation is one of the channels through which ownership translates into better investor rewards. These findings are consistent with a "rational investor" viewpoint in which, at least, some investors incorporate managerial ownership in their portfolio allocation decisions.

In the second essay, I analyze the "herding" (trading together) behavior of managers, conditional on their ownership stakes in the funds they manage. I find that the funds with low and high managerial ownership have economically distinct patterns in their herding behavior. Each herd has its own distinct trading style and different qualitative and quantitative effect on stock prices. Low ownership funds herd more and engage in positive-feedback trading that is followed by stock price reversals. High ownership fund herding is followed by more stable price adjustments. Low ownership herding effects appear to dominate in the full sample where herding causes price reversal. These findings suggest that there is heterogeneity in the herding behavior of mutual funds, which appears to be related with ownership. It is costly for the high ownership managers to ignore their substantive information due to reputational concerns, or to engage in uninformed trading, and thus herding by such managers results in more informative prices. On the other hand, lower ownership fund herding appears to be driven by agency that generates temporary price movements that are reversed.

In the third essay, I and my co-authors, Gerard Hoberg and N. R. Prabhala, propose new techniques for identifying benchmark peers for mutual funds. We identify the location of funds in the space of stock style characteristics. All funds within a pre-specified normed distance are a fund's peers. Our benchmark peers are customized to each fund, intransitive, and employ techniques that are readily scalable across dimensions and loss functions. We show that peers derived in this fashion are significantly different cross-sectionally from conventional peers and exhibit considerable dynamic churn. The customized peers we construct outperform traditional peers in out of sample prediction tests, have lower tracking error, and our peer-excess alphas predict the future Characteristic-Selectivity and Carhart alphas of funds. We find that measures of competition derived from our peers predict performance persistency of funds for up to four quarters.

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• Mutual Funds

A diversified portfolio of securities that is aimed to attract yields and appreciation of their value is called mutual funds. A mutual fund is an investment vehicle that investors use to increase the value of their savings. There are different managers for different fund. Their main task is to increase the return and to minimize the risk.

Mutual Funds and their Types

The profits that are earned in investment is distributed by the investors based on the unit held by them. As there is a huge number of investors, the risk is minimized. In India, the mutual funds are governed by the association of mutual funds. Also, this body, in turn, is managed by the securities and exchange board of India.

Types of Mutual Funds

Open-ended funds.

Here, open end means a scheme where mutual funds offer units as a sale. In this scheme, the duration is not mentioned for redemption. Also, there is no fixed entry to the fund as well as no fixed maturity.

Thus, it depends on the investors and they can subscribe anytime for this scheme. Also, investors have an option to redeem their holdings anytime.

Closed-end Fund

The name is close-ended because the period of maturity for this scheme is fixed. Also, the corpus in these funds is fixed. Thus, an investor can only subscribe to this scheme directly during the initial phase.

Income Funds

The main purpose of these funds is to provide maximum return or income to the investors. In these funds, the investment is done in the stocks that yield the highest returns. Also, capital appreciation in these funds or of little importance. Furthermore, these types of funds distribute the income that is earned by them in a cyclical manner.

Interval Funds

Under the interval scheme, a mutual fund is kept open for a specific period of time. After this time period, it operates as a closed scheme. So, it is a combination of both closed and open-ended schemes.

Benefits of Mutual Funds

Risk reduction.

As mutual funds are managed professionally it reduces the risk factor. Also, they are invested in a huge number of companies. Thus, the risk factor is reduced more.

Diversification

There are a large number of investors that has savings with them. Thus, these small savings are brought together and a mutual fund is created. So, this can be used to buy the share of many different companies. Also, because of this diversification, the investment ensures capital appreciation and regular return.

Tax advantage

There are many schemes in a mutual fund that provide a tax advantage under the new income tax act. So, the liability of paying the tax of an investor is also reduced. This can be possible only when he/she invests in mutual funds.

Investor protection

Mutual funds are monitored and regulated by the SEBI. Thus, it provides better protection to its investors. Also, this makes sure that there is no legal obligation for the investors.

Questions on Mutual Funds

Q. Which is the first commercial bank in India to launch a mutual fund?

C. Canara Bank

D. Bank of India

Answer:  A. SBI

Q. Which of the following organization is the regulator of mutual funds in India?

Answer: B. SEBI

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Essay on Mutual Funds: Top 8 Essays | Money Market | Financial Management

Here is an essay on ‘Mutual Funds’ for class 11 and 12. Find paragraphs, long and short essays on ‘Mutual Funds’ especially written for college and management students.

Essay on Mutual Funds

Essay Contents:

• Essay on the Disadvantages of Mutual Funds

Essay # 1. Introduction to Mutual Funds:

Mutual funds are money-managing institutions that pool money from the public and invest it in capital market (e.g. stocks, bonds and other securities). Such schemes are managed by Asset Management Companies (AMC), which are sponsored by different financial institutions or companies. Mutual funds issue units to the investors, which represent an equitable right in the assets of the mutual fund.

This unit has a value called as Net Asset Value (NAV). It is calculated by subtracting liabilities from the value of a fund’s securities and other items of value and dividing this by the number of outstanding shares.

So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.

Essay # 2. Types of Mutual Fund Schemes :

On the basis of their structure and objectives, mutual fund can be classified into various types as displayed in figure 8.2.

A. On the Basis of Maturity :

i. Open-End Funds :

Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day.

ii. Closed-End Funds :

Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the funds is not allowed.

However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The NAY of a closed-end fund is computed on a weekly basis (updated every Thursday).

2. Closed-end Funds may also offer “buy-back of units” to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed.

B. On the Basis of Investment Objectives :

1. Equity Funds :

Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, growth option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date.

Equity funds can also be further classified into:

(a) Sector Based Equity Funds:

These are those funds that that restrict their investments to a particular segment or sector of the economy. Also known as thematic funds, these funds concentrate on one industry such as infrastructure, banking, technology, energy, real estate, power heath care, FMCG, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential.

(b) Medium and Small Cap Equity Based Funds:

These funds invest in companies that are medium or small cap companies. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company’s share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.

(c) Large Capitalization Funds:

These funds invest in companies that are large cap companies. Market capitalization of large cap companies is more than Rs. 2500 crores.

(d) Diversified Funds:

These funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past.

(e) Value Funds:

These funds invest in companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio.

2. Debt Oriented Schemes :

Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors.

In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment.

3. Balance Funds :

These funds generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth.

4. Liquid or Money Market Funds :

These funds invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

5. Gilt Funds :

These funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors.

6. Index Fund:

These funds invest in companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex)

C. On the Basis of Load :

i. Load Funds :

Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund manager’s salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds.

A load fund may impose following types of loads on the investors:

1. Entry Load:

It refers to the load charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investor’s contribution amount to the fund.

2. Exit Load:

These charges are imposed on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor

ii. No-Load Funds :

All those funds that do not charge any loads are known as No-load Funds

D. On the Basis of Tax :

i. Tax-Exempt Funds :

Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are tax-free.

ii. Non-Tax-Exempt Funds :

Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.

Essay # 3. Mutual Funds offer Schemes with Two Options – Dividend and Growth Option :

i. Dividend Payout Option :

This option proposes to timely pay distributable surplus/profits to the investor in the form of dividends (either through cheques or ECS (Electronic Clearing Service) credits), thereby facilitating the investor to liquidate profits. The dividend option does not re-invest the profits made by the fund though its investments. Instead, it is given to the investor from time to time.

ii. Growth Option :

Under this option, the investor does not receive any dividends. Instead he continues to enjoy compounded growth in value of the mutual fund scheme, subject to the investment bets taken by the fund manager. In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time.

There is one more option that is provided by some of the new mutual fund schemes :

a. Bonus Option:

Under bonus option the investor is not paid regular dividends. Instead he continues to receive bonus units in accordance to a ratio declared by the fund house, (very few mutual fund houses have this option).

b. The Impact on the NAV :

The NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors.

c. The Tax Impact :

Dividends from a mutual fund are not taxed. When the investor sells the units of a mutual fund and makes a profit, it is known as capital gain.

d. Equity and Equity Related Funds :

If you sell the units of such funds within a year of your purchase, the profit on this sale is called a short-term capital gain. It is taxed @15% on short-term capital gain. If you make a make a profit by selling the units after a year, it is called long-term capital gain. This is not taxed.

Net assets of the scheme = Market value of the investments + receivables + other accrued income + other assets – Accrued expenses – other payables – other liabilities.

NAV is computed per unit of holding. If total assets of a scheme are Rs. 50 crores and liabilities are Rs. 10 crores and there are 2 crores unit holders, the NAV per unit is Rs. 20.

A new investor invests at the value of the existing NAV of a particular scheme. Since, investments by a Mutual Fund are marked to market, the value of the investments for computing NET ANNUAL VALUE will be at market value. NAV of Mutual Fund schemes are published on a daily basis in Newspapers and play an important role in investor’s decision to enter or exit. The NAV is used to calculate the yield on the schemes.

Essay # 4. Calculating Returns on Mutual Fund :

Investors derive income from mutual fund units in following ways:

1. Cash dividend

2. Capital gains disbursement

3. Changes in the funds NAV per unit (unrealized gain)

The one year holding period return is calculated as follows:

D = Dividend received

C = Capital Gain realized

NAV 1 = Net Asset Value at the end of year

NAV o = Net Asset Value at the beginning of the year

Essay # 5. Mutual Fund Performance Evaluation with the Help of Ratios :

1. Sharpe’s Ratio :

This ratio was given by Nobel Laureate US Economist William Sharpe. It is a reward to variability ratio. It is the ratio of the risk premium to the variability of returns (standard deviation of returns).

The formula is:

r p = Expected return on the portfolio

r f = Risk free rate of return

σ p = Standard deviation of portfolio return

The higher a Sharpe’s ratio, the better a portfolio’s returns have been relative to the degree of investment risk taken by the investor.

Interpretation of Value:

A ratio of 1 indicates one unit of return per unit of risk, a ratio of 2 indicates two units of return per unit of risk, and negative values indicate loss or that a disproportionate amount of risk was taken to generate a positive return.

Advantages :

i. It is a very simple measure as well as very easy to calculate

ii. It is an excellent tool to compare multiple investments that are all within the risk tolerance of the investor. Comparing the Sharpe Ratios of such investments will give an excellent idea of how much each investment is compensating for the risk as compared to the other investments.

iii. It is arguably more versatile than other metrics such as Alpha and Beta. While Beta needs to be based off a specific index and the precision of Alpha is based on a high R ^ 2, Sharpe Ratio has no such restrictions. A Sharpe Ratio can be used to compare different types of investments (stock funds and bond funds) using the same assumptions

Limitations :

i. The Sharpe Ratio uses only the standard deviation as a measure of risk. This can be problematic when calculating the Ratio for asymmetric returns because the Standard deviation is most appropriate as a measure of risk for strategies with approximately symmetric return distributions.

ii. The Ratio formula assumes that the risk free rate is constant, but practically, it is not so.

iii. By looking at its formula, it can be seen that the ratio should decrease if we increase the risk (volatility) but that is true only when the Sharpe ratio is positive. However, with a negative Sharpe ratio, increasing risk results in a larger Sharpe ratio. Therefore, Sharpe ratio should not be used as a measure to compare portfolios that have a negative Sharpe ratio value.

2. Treynor Ratio :

This ratio was developed by Jack Treynor. It is a reward to volatility ratio. It is the ratio of the risk premium to the volatility of returns (portfolio beta).

β p = Portfolio Beta

The higher a Treynor’s ratio, the better a portfolio’s returns have been relative to the degree of market risk taken by the investor.

i. It measures the volatility in terms of non-diversifiable risk i.e. market risk (systematic risk).

ii. It is useful in comparing funds that invest in similar market sectors and achieve similar returns

i. Past beta values are used, so historical in nature.

ii. As the ratio measures the reward against systematic risk, it is not very useful for measuring returns of a less diversified portfolio with high unsystematic risk.

In a fully diversified portfolio, Treynor’s ratio would be the appropriate measure of performance evaluation. For a portfolio that is not so well diversified, the Sharpe’s ratio would be appropriate.

3. Jensen’s Alpha :

This ratio was developed by Michael Jensen. It measures the differential between the actual return earned on a portfolio and the return expected from the portfolio given its level of risk.

Jensen’s alpha = Return of the portfolio – Expected return (as per CAPM model)

α p Jensen’s alpha

β p Portfolio beta

r p Expected total portfolio return

r f Risk free rate of return

r m Expected market return

A positive alpha figure indicates the fund has performed better than its beta would predict. A negative alpha indicates a fund has underperformed, given the expectations established by the fund’s beta.

4. Fama’s Net Selectivity Measure :

It was developed by Eugene Fama. This value measures the overall performance of a fund. It provides an analytical framework that allows a detailed breakdown of a fund’s performance into the source or components of performance.

The total return of a portfolio can be broken into two broad components, risk free return and excess return. This excess return can then be broken into other components like return from market risk, return from diversifiable risk and return from pure selectivity.

Total return = Risk free return + Excess return i.e. Total return = Risk free return + (Return from market risk + Return from diversifiable risk + Return from pure selectivity)

It can be represented as:

r p = Return of the portfolio

r f = Risk free rate of Return

r 1 = Return from market risk

r 2 = Return from diversifiable risk

r 3 = Return from pure selectivity

Substitute the above values with the following ones:

Β p = Portfolio beta

r m = Expected market return

σ m = Standard deviation of market index return

By substituting, we get,

If the value of this measure is positive, it means that the portfolio manager (fund manager) has been successful in selecting the right stocks for the portfolio. If the value is negative, it is n indicator of poor performance of the portfolio manager. Thus, basically Fama’s net selectivity measure is useful in analyzing the effectiveness of the skills of the fund manager.

5. Management Expenses Ratio :

It measures the percentage of expenses that were spent to run a mutual fund scheme. It includes expenses like management and advisory fees, consultancy fees, etc. but does not include brokerage costs for trading the portfolio. A lower value is a sign of cost effective fund management.

Management expenses ratio = Expenses per unit / Average NAV

Average NAV = (NAV at beginning of year + NAV at end of year) / 2

Essay # 6. Systematic Investment Plan (SIP) :

An SIP is a method of investing a fixed sum, on a regular basis, in a mutual fund scheme. It is similar to regular saving schemes like a recurring deposit. An SIP allows one to buy units on a given date each month. A SIP can be started with as small as Rs 500 per month in ELSS schemes.

Advantages of SIP :

i. Rupee Cost Averaging :

SIP minimizes the effects of investing in volatile markets. It helps in averaging out the cost by generating superior returns in the long run. It reduces the risk associated with lump sum investments. Since one get more units when the NAV drops and fewer when it rises, the cost averages out over time Thus the average cost of the investment is often reduced.

ii. Convenience and Regularity :

SIP gives the convenience to pay through Electronic clearance service (ECS) or Auto Debit. A fixed amount will automatically get debited from the account on a date specified by the investor.

iii. Disciplined Approach towards Investment :

Since the investor invests regularly, it leads to disciplined savings, which leads to wealth accumulation. Disciplined investing is vital to earning good returns over a longer time frame.

In the above table, the investor has acquired the maximum number of units when the NAV was the lowest at Rs.9 and minimum number of units when the NAV was the highest at Rs.16. Thus, it enables investors to do rupee cost averaging.

Essay # 7. Advantages of Mutual Funds :

1. Professional Management:

The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

2. Diversification:

By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others

3. Economies of Scale:

Since a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions

4. Liquidity:

Just like an individual stock, a mutual fund allows you to convert your shares into cash at any time.

5. Minimum Investment:

Mutual fund companies nowadays offer schemes with minimum investment as low as Rs.500 invested on a monthly basis.

6. Choice of Schemes:

Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options.

7. Transparency:

Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator

8. Flexibility:

Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes.

Mutual Fund industry is part of a well-regulated investment environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced.

10. Tax Benefit:

Investors get benefit of taxes u/s 80C for investing in Equity Linked Saving Scheme.

Essay # 8. Disadvantages of Mutual Funds :

Many investors debate whether or not the professionals are any better than you at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still gets paid.

Creating, distributing, and running a mutual fund is an expensive proposition. Everything from the manager’s salary to the investors’ statements cost money. Those expenses are passed on to the investors. Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund.

3. No Customized Portfolios:

The portfolio of securities in which a fund invests is a decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives.

4. Dilution:

It’s possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don’t make much difference on the overall return

5. Difficulty in Selecting a Suitable Fund Scheme:

Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives

When a fund manager sells a security, a capital-gains tax is triggered. Investors who are concerned about the impact of taxes need to keep those concerns in mind when investing in mutual funds.

Related Articles:

• Mutual Funds: Compilation of Essays on Mutual Funds | Financial Management
• Calculating the Return on Mutual Funds (Formula) | Financial Management
• Determining the Variability of Return on Mutual Funds | Financial Management
• Classification of Mutual Funds

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Mutual Funds: Essay on Mutual Funds!

Investors have a basic choice: they can invest directly in individual securities, or they can invest indirectly through a financial intermediary. Financial intermediaries gather savings from investors and invest these monies in a portfolio of financial assets.

Image Courtesy : omgtoptens.com/wp-content/uploads/2013/09/mutual_funds_india.jpg

Mutual Fund:

A mutual fund is a type of financial intermediary that pools the funds of investors who seek the same general investment objective and invests there in a number of different types of financial claims (e.g., equity shares, bonds, money market instruments).

These pooled funds provide thousands of investors with proportional ownership of diversified portfolios managed by professional investment managers. The term ‘mutual’ is used in the sense that all its returns, minus its expenses, are shared by the fund’s unit holders.

Mutual fund investing vs. investing through banks:

Mutual funds are only one kind of financial intermediary. Bank is the largest intermedi­ary in the financial system. Thousands of depositors pool their savings in a bank. However, investments in banks entitle the depositors to different financial claims than the one generated by the mutual funds.

Pass-Through Structure:

In a sense, mutual fund is the purest form of financial intermediary because there is almost perfect pass through of money between unit holders (savers) and the securities in which the fund invests.

Unit holders are indicated a-priori in what type of securities their funds will be invested. Value of the securities held in the fund portfolio is trans­lated on the daily basis directly to the value of the fund units held by the unit holders.

By contrast, a commercial bank is not a pass through type of financial intermediary. Banks collect deposits from depositors (savers). The depositors have no specific know­ledge of how their funds will be used.

Bank invests the monies of the depositors in loans & advances which the bank officers feel appropriate at the time. On the deposits collected banks usually give a specified rate of return (interest) that is not linked to the performance of its loans & advances portfolio.

How Risky is a Mutual Fund Investors May Lose Money in a Mutual Fund:

It is important to understand that a mutual fund is as risky as the underlying assets in which it invests. Though regulations ensure disciplined investments and ceilings on expenses that are charged to the unit holders, unit holders assume investment or market risk, including the possible loss of principal, because mutual funds invest in securities whose value may rise and fall.

Unlike bank deposits, mutual funds are not insured under Deposit Insurance and Credit Guarantee Corporation Act, 1961Of course there is also an upside to investment or market risk. Generally speaking, if you aspire for higher returns then you have to take greater risk. One has to evaluate the riskiness of a mutual fund from the assets it invests.

Related Articles:

• The Structure of Mutual Funds in UK Organizations
• Mutual Funds: Rationale for and Strengthening the Mutual Funds

Mutual Funds

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Are Mutual Funds a Good Investment for Your Portfolio?

Explore the benefits and drawbacks of investing in mutual funds..

Our listing of the best mutual funds sticks to U.S. and international equity funds, plus one allocation fund and one short-term bond fund. Sometimes investors trade returns for dividends when buying income funds. These picks have supplied both. To invest in mutual funds, you'll want to decide what type of funds match your goals, choose an online brokerage account and research your options. Mutual Funds: Investing based on last year's top performers is not reliable. Diversification and considering factors like rolling returns are key. Money market funds are low- risk investments for parking your cash, earning interest while providing very good liquidity. A strong portfolio will be diversified across different asset classes, such as stocks and bonds, and across market sectors.

The best Vanguard mutual funds might cover a wide assortment of investing strategies, but they have two things in common: simplicity and reliability. Overall, ETFs hold an edge because they tend to use passive investing more often and have some tax advantages. If you've ever participated in an employer's 401(k) plan, there's a good chance you've had T. Rowe Price mutual funds among your investments.

• DOI: 10.1016/j.najef.2024.102283
• Corpus ID: 272516268

Who is smarter? Evidence from extreme financial risk contagion in hedge funds and mutual funds

• Changqing Luo , Xinxin Fu , +1 author Liang Dong
• Published in The North American journal of… 1 September 2024
• Economics, Business

66 References

Hedge fund fee structure and risk exposure, hedge fund manager timing and selectivity skill over time. a holdings-based estimate, do sophisticated investors follow fundamental analysis strategies evidence from hedge funds and mutual funds, robust leverage choice of hedge funds with rare disasters, hedge fund sales fees and the flow of funds around the world, does individualism matter for hedge funds a cross-country examination, are mutual fund manager skills transferable to private funds, trading off accuracy for speed: hedge funds' decision-making under uncertainty, do mutual funds lose talent to hedge funds evidence from china, a general method for analysis and valuation of drawdown risk under markov models, related papers.

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Animal spirits: Superstitious behavior by mutual fund managers

66 Pages Posted:

Shenglan Chen

Zhejiang University of Technology

Inner Mongolia University of Finance and Economics

P. Raghavendra Rau

University of Cambridge

University of Essex

Date Written: August 31, 2024

Using a unique dataset from China spanning 2005 to 2023, we investigate how superstitious beliefs influence mutual fund managers' risk-taking behavior and how this influence evolves over their careers. We find a significant 6.82% reduction in risk-taking during managers' zodiac years, traditionally considered unlucky in Chinese culture. This effect is particularly pronounced among less experienced managers, those without financial education backgrounds, and those with lower management skills. The impact also intensifies during periods of high market volatility. Our findings challenge the traditional dichotomy between retail and professional investors, showing that even professional fund managers can be influenced by irrational beliefs early in their careers. However, the diminishing effect of superstition with experience and expertise suggests a gradual transition towards more rational decision-making. Our results provide insights into the process by which financial professionals evolve from exhibiting behavior akin to retail investors to becoming the rational actors often assumed in financial theory.

Keywords: Zodiac year, Risk-taking, Mutual funds, Behavioral finance, Asset management, Investment Strategies, Superstition

Suggested Citation: Suggested Citation

Zhejiang University of Technology ( email )

Inner mongolia university of finance and economics ( email ), university of cambridge ( email ).

Cambridge Judge Business School Trumpington Street Cambridge, Cambridgeshire CB21AG United Kingdom 3103626793 (Phone)

HOME PAGE: http://www.raghurau.com/

Cheng Yan (Contact Author)

University of essex ( email ).

Wivenhoe Park Colchester, CO4 3SQ United Kingdom

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