Mutual Funds and Money Market Mutual Funds Structure

A mutual fund is an investment company that sells shares and invests the proceeds in a portfolio of securities.  These securities include stocks, bond, money market instruments, real estate, precious metals, cash, and other asset classes.  The mutual fund buys a portfolio of securities selected by a professional investment adviser to meet a specified financial goal.  There are thousands of mutual funds that an investor can choose from.  Some mutual funds offer investments in a single category, such as a stock only fund, while others have a mix of investment types.  For example, some funds may contain only stocks a specific category of stocks or both stocks and bonds.  Money market funds are no exception, some money market funds will buy only certain types of money market securities such as only Treasury bills and notes whether other money market funds may invest to in commercial paper and Treasury securities.

Mutual fund investors buy shares in the fund that represent ownership in all of the fund’s securities.  The mutual fund buys investments with the money collected by selling the shares.  An equity mutual fund uses the proceeds from share sales to buy equities either broadly or in a specific category, depending on the fund type and investment objective, a money market mutual fund uses the share sales proceeds to buy money market instruments.  Money market funds have very regulated and fairly limited investment variety compared to equity funds.  Money market funds have substantially less comparative risks, compared to other mutual funds and pay dividends that generally reflect short term interest rates. 

A mutual fund is usually either a corporation or a business trust, which is similar to a corporation.  Like any corporation, a mutual fund is owned by its shareholders.  Virtually all mutual funds are externally managed; they do not have employees of their own.  Instead, their management operations are conducted by affiliated organizations and independent contractors.

Two significant benefits of investing in mutual funds are diversification and lower transaction costs.  By investing in the securities whose prices do not move together, the fund achieves a level of diversification at a lower price than what you would pay to diversify with individual securities.  The benefit of the structure in mutual funds is that the fund is able to pool money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities for much greater diversification.  Since the mutual fund will be invested in a variety of different securities that match its goal, the fund is not dependent on the return on a relatively limited amount of holdings.  Because the individual investors’ money is pooled in with the other investors in that fund when an investor buys shares in the mutual fund, there is much greater buying power than would occur if someone invested on your own.  The benefits of diversification is a benefit of most categories of mutual funds but can be especially beneficial in money market mutual funds since many of the fund holdings are bought and sold in large denominations.
 
A mutual fund, whether it is a money market mutual fund or another category of mutual fund, can be purchased by investors from the fund directly, or through a broker for the mutual fund, but investors are not able to purchase the shares from other investors on a secondary market, such as the New York Stock Exchange or Nasdaq Stock Market.  The price investors pay for mutual fund shares is the funds approximate per share net asset value (NAV) plus any shareholder fees that the fund imposes at purchase, such as sales loads.

When an investor wants to sell his shares in a money market mutual fund the mutual fund shares are redeemed.  A mutual fund stands ready to buy back its shares at their current net asset value, which is the total market value of the fund’s investment portfolio, minus its liabilities, divided by the number of shares outstanding.  This means that when mutual fund investors want to sell their fund shares, they sell them back to the fund or to a broker acting for the fund at their approximate per share NAV.  All mutual funds will redeem or buy back your shares on any business day and must send you the payment within seven days.

This entry was posted on Tuesday, January 6th, 2009 at 3:38 pm and is filed under Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.