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A mutual fund is a professionally managed type of collective investment bonds (short- or long-term).

r long-term). Both stock and bond funds can invest in


scheme that pools money from many investors and invests typically in primarily U.S. securities (domestic funds), both U.S. and foreign securities
investment securities (stocks, bonds, short-term money market instruments, (global funds), or primarily foreign securities (international funds). Since
other mutual funds, other securities, and/or commodities such as precious fund names in the past may not have provided a prospective investor a good
metals).[1] The mutual fund will have a fund manager that trades (buys and indication of the type of fund it was, the SEC issued a rule under the '40 Act
sells) the fund's investments in accordance with the fund's investment which aims to better align fund names with the primary types of investments
objective. In the U.S., a fund registered with the Securities and Exchange in which the fund invests, commonly called the "name rule". Thus, under
Commission (SEC) under both SEC and Internal Revenue Service (IRS) this rule, a fund must invest under normal circumstances in at least 80% of
rules must distribute nearly all of its net income and net realized gains from the securities referenced in its name. for example, the "ABC New Jersey Tax
the sale of securities (if any) to its investors at least annually. Most funds are Free Bond Fund" would generally have to invest, under normal
overseen by a board of directors or trustees (if the U.S. fund is organized as circumstances, at least 80% of its assets in tax-exempt bonds issued by the
a trust as they commonly are) which is charged with ensuring the fund is state of New Jersey and its political subdivisions. Some fund names are not
managed appropriately by its investment adviser and other service associated with specific securities so the name rule has less relevance in
organizations and vendors, all in the best interests of the fund's investors. those situations. For example, the "ABC Freedom Fund" is such that its
Since 1940 in the U.S., with the passage of the Investment Company Act of name does not imply a specific investment style or objective. Lastly, an
1940 (the '40 Act) and the Investment Advisers Act of 1940, there have been index fund strives to match the performance of a particular market index,
three basic types of registered investment companies: open-end funds (or such as the S&P 500 Index. In such a fund, the fund would invest in
mutual funds), unit investment trusts (UITs); and closed-end funds. Other securities and likely specific derivates such as S&P 500 stock index futures
types of funds that have gained in popularity are exchange traded funds in order to most closely match the performance of that index.
(ETFs) and hedge funds, discussed below. Similar types of funds also Most mutual funds' investment portfolios are continually monitored by one
operate in Canada, however, in the rest of the world, mutual fund is used as or more employees within the sponsoring investment adviser or management
a generic term for various types of collective investment vehicles, such as company, typically called a portfolio manager and their assistants, who
unit trusts, open-ended investment companies (OEICs), unitized insurance invest the funds assets in accordance with its investment objective and trade
funds, undertakings for collective investments in transferable securities securities in relation to any net inflows or outflows of investor capital (if
(UCITS, pronounced "YOU-sits") and SICAVs (pronounced "SEE-cavs"). applicable), as well as the ongoing performance of investments appropriate
for the fund. A mutual fund is advised by the investment adviser under an
History advisory contract which generally is subject to renewal annually.

Massachusetts Investors Trust (now MFS Investment Management) was Types of mutual funds
founded on March 21, 1924, and, after one year, it had 200 shareholders and
$392,000 in assets. The entire industry, which included a few closed-end [edit]Open-end fund, forms of organization, other funds
funds, represented less than $10 million in 1924. The term mutual fund is the common name for what is classified as an open-
The stock market crash of 1929 hindered the growth of mutual funds. In end investment company by the SEC. Being open-ended means that, at the
response to the stock market crash, Congress passed the Securities Act of end of every day, the fund continually issues new shares to investors buying
1933 and the Securities Exchange Act of 1934. These laws require that a into the fund and must stand ready to buy back shares from investors
fund be registered with the U.S. Securities and Exchange Commission redeeming their shares at the then current net asset value per share.
(SEC) and provide prospective investors with a prospectus that contains Mutual funds must be structured as corporations or trusts, such as business
required disclosures about the fund, the securities themselves, and fund trusts, and any corporation or trust will be classified by the SEC as an
manager. The Investment Company Act of 1940 sets forth the guidelines investment company if it issues securities and primarily invests in non-
with which all SEC-registered funds must comply. government securities. An investment company will be classified by the
With renewed confidence in the stock market, mutual funds began to SEC as an open-end investment company if they do not issue undivided
blossom. By the end of the 1960s, there were approximately 270 funds with interests in specified securities (the defining characteristic of unit investment
$48 billion in assets. The first retail index fund, First Index Investment trusts or UITs) and if they issue redeemable securities. Registered
Trust, was formed in 1976 and headed by John Bogle, who conceptualized investment companies that are not UITs or open-end investment companies
many of the key tenets of the industry in his 1951 senior thesis at Princeton are closed-end funds. Closed-end funds are like open end except they are
University.[2] It is now called the Vanguard 500 Index Fund and is one of more like a company which sells its shares a single time to the public under
the world's largest mutual funds, with more than $100 billion in assets. an initial public offering or "IPO". Subsequently, the fund's shares trade with
A key factor in mutual-fund growth was the 1975 change in the Internal buyers and sellers of shares in the secondary market at a market-determined
Revenue Code allowing individuals to open individual retirement accounts price (which is likely not equal to net asset value) such as on the New York
(IRAs). Even people already enrolled in corporate pension plans could or American Stock Exchange. Except for some special transactions, the fund
contribute a limited amount (at the time, up to $2,000 a year). Mutual funds cannot continue to grow in size by attracting more investor capital like an
are now popular in employer-sponsored "defined-contribution" retirement open-end fund may.
plans such as (401(k)s) and 403(b)s as well as IRAs including Roth IRAs. [edit]Exchange-traded funds
As of October 2007, there are 8,015 mutual funds that belong to the Main article: Exchange-traded fund
Investment Company Institute (ICI), a national trade association of
investment companies in the United States, with combined assets of $12.356 A relatively recent innovation, the exchange-traded fund or ETF, is often
trillion.[3] In early 2008, the worldwide value of all mutual funds totaled structured as an open-end investment company. ETFs combine
more than $26 trillion.[4] characteristics of both mutual funds and closed-end funds. ETFs are traded
throughout the day on a stock exchange, just like closed-end funds, but at
Usage, investment objectives prices generally approximating the ETF's net asset value. Most ETFs are
index funds and track stock market indexes. Shares are issued or redeemed
Since the Investment Company Act of 1940, a mutual fund is one of three by institutional investors in large blocks (typically of 50,000). Most
basic types of investment companies available in the United States.[5] investors buy and sell shares through brokers in market transactions.
Mutual funds may invest in many kinds of securities (subject to its Because the institutional investors normally purchase and redeem in in kind
investment objective as set forth in the fund's prospectus, which is the legal transactions, ETFs are more efficient than traditional mutual funds (which
document under SEC laws which offers the funds for sale and contains a are continuously issuing and redeeming securities and, to effect such
wealth of information about the fund). The most common securities transactions, continually buying and selling securities and maintaining
purchased are "cash" or money market instruments, stocks, bonds, other liquidity positions) and therefore tend to have lower expenses.
mutual fund shares and more exotic instruments such as derivatives like Exchange-traded funds are also valuable for foreign investors who are often
forwards, futures, options and swaps. Some funds' investment objectives able to buy and sell securities traded on a stock market, but who, for
(and or its name) define the type of investments in which the fund invests. regulatory reasons, are limited in their ability to participate in traditional
For example, the fund's objective might state "...the fund will seek capital U.S. mutual funds.
appreciation by investing primarily in listed equity securities (stocks) of U.S. [edit]Equity funds
companies with any market capitalization range." This would be "stock" Equity funds, which consist mainly of stock investments, are the most
fund or a "domestic/US stock" fund since it stated U.S. companies. A fund common type of mutual fund. Equity funds hold 50 percent of all amounts
may invest primarily in the shares of a particular industry or market sector, invested in mutual funds in the United States.[7] Often equity funds focus
such as technology, utilities or financial services. These are known as investments on particular strategies and certain types of issuers.
specialty or sector funds. Bond funds can vary according to risk (e.g., high-
yield junk bonds or investment-grade corporate bonds), type of issuers (e.g.,
government agencies, corporations, or municipalities), or maturity of the