Types of Mutual Funds
The mutual fund industry is huge. There are thousands of choices for investors, and many different types of funds. These types are defined by investment objective as well as by the cost to invest. Objectives include growth or income, conservative versus speculative, and even type of investment. Some funds specialize in regions or countries, others in specific sectors or types of companies. Any theme you can imagine has probably been set up and organized in some type of mutual fund. The basic type of mutual fund is an open-end fund, meaning that the fund will accept as many investors and as much money as it can raise, without limitation.
So a successful fund is likely to grow over time as a growing number of new people open accounts and send in their dollars. This is the most common and popular type of mutual fund.
Key Point Mutual funds are so popular that you can find one perfectly suited to your investment objectives.
Compared to the open-end fund
, the closed-end fund does place restrictions on the number of shares outstanding. While the open-end fund allows investors to buy and then redeem shares directly with the fund management, a closed-end fund is more like a stock. Shares are traded over a stock exchange and could actually grow in value above the true assets value of the portfolio, if demand for those shares is strong enough based on the fund's performance There are few closed-end funds available today, and for every closed-end fund there are more than 13 open-end funds on the market. The newest type of mutual fund is the exchange-traded fund (ETF
), which also trades on stock exchanges and contains a preidentified basket of stocks in its portfolio. In 1995, there were only two ETFs; by the end of 2008, there were more than 700 and the number expands rapidly every year. A final broad classification in the mutual fund group is called a unit investment trust (UIT)
. This is a type of fund that buys bonds and other income-generating securities, pools them together and then sells shares to investors. A UIT is not actively managed like a traditional mutual fund, because the portfolio of income securities is purchased in advance. Payments are made for capital gains, dividends, and interest as these are earned.
Key Point The ETF as an alternative to the traditional mutual fund makes sense; it is easily traded, management fees are minimal, and the portfolio is picked in advance.
The level of investment in mutual funds, ETFs, and UITs has grown substantially over the years. Table below summarizes the amount of cash placed into funds between 1995 and 2008. [caption id="attachment_12708" align="aligncenter" width="514"]
Investments in mutual funds (in $ billions)[/caption]
The $10 trillion invested at the end of 2008 was owned by more than 93 million U.S. investors, according to the Investment Company Institute (ICI
). The growth in mutual fund investing has been impressive.
For more statistics and information about mutual funds, check the Investment Company Institute website at www.ici.org
, and to see the complete annual Fact Book ICU publishes, go to www.icifactbook.org/pdf/2009_factbook.pdf
The numbers of mutual fund companies by type is also interesting. Table below summarizes this information. [caption id="attachment_12709" align="aligncenter" width="511"]
Number of investment companies by type[/caption]
By Michael C. Thomsett