The Basics of Mutual Funds.  What is a Mutual Fund? Essential of Investments Course | CFA Exam
Channel: Farhat Lectures. The # 1 CPA & Accounting Courses
Date: 2020-07-25

In this video, I explain the basics of mutual fund.  This is a basic explanation of mutual fund as part of my essentials of investment course.  In a basic explanation, a mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.

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Each mutual fund has a specified investment policy, which is described in the fund’s prospectus. For example, money market mutual funds hold the short-term, low-risk instruments of the money market , while bond funds hold fixed-income securities. Some funds have even more narrowly defined mandates. For example, some bond funds will hold primarily Treasury bonds, others primarily mortgage-backed securities.
Management companies manage a family, or “complex,” of mutual funds. They organize an entire collection of funds and then collect a management fee for operating them. By managing many funds under one umbrella, these companies make it easy for investors to allocate assets across market sectors and to switch assets across funds while still benefiting from centralized record keeping. Some of the most well-known management companies are Fidelity, Vanguard, and T. Rowe Price.
MONEY MARKET FUNDS These funds invest in money market securities such as Treasury bills, commercial paper, repurchase agreements, or certificates of deposit. The average maturity of these assets tends to be a bit more than one month. They usually offer check-writing features, and net asset value is fixed at $1 per share,1 so there are no tax implications such as capital gains or losses associated with redemption of shares.
EQUITY FUNDS Equity funds invest primarily in stock, although they may, at the portfolio manager’s discretion, also hold fixed-income or other types of securities. Equity funds commonly will hold a small fraction of total assets in money market securities to provide the liquidity necessary to meet potential redemption of shares.

Stock funds are traditionally classified by their emphasis on capital appreciation versus current income. Thus, income funds tend to hold shares of firms with high dividend yields that provide high current income. Growth funds are willing to forgo current income, focusing instead on prospects for capital gains. While the classification of these funds is couched in terms of income versus capital gains, the more relevant distinction in practice concerns the level of risk these funds assume. Growth stocks—and therefore growth funds—are typically riskier and respond more dramatically to changes in economic conditions than do income funds.
SPECIALIZED SECTOR FUNDS Some equity funds, called sector funds, concentrate on a particular industry. For example, Fidelity markets dozens of “select funds,” each of which invests in a specific industry such as biotechnology, utilities, energy, or telecommunications. Other funds specialize in securities of particular countries.

BOND FUNDS As the name suggests, these funds specialize in the fixed-income sector. Within that sector, however, there is considerable room for further specialization. For example, various funds will concentrate on corporate bonds, Treasury bonds, mortgage-backed securities, or municipal (tax-free) bonds. Indeed, some municipal bond funds invest only in bonds of a particular state in order to satisfy the investment desires of residents of that state who wish to avoid local as well as federal taxes on interest income. Many funds also specialize by maturity, ranging from short-term to intermediate to long-term, or by the credit risk of the issuer, ranging from very safe to high-yield or “junk” bonds.

INTERNATIONAL FUNDS Many funds have an international focus. Global funds invest in securities worldwide, including the United States. In contrast, international funds invest in securities of firms located outside the U.S. Regional funds concentrate on a particular part of the world, and emerging market funds invest in companies of developing nations.
BALANCED FUNDS Some funds are designed to be candidates for an individual’s entire investment portfolio. These balanced funds hold both equities and fixed-income securities in relatively stable proportions. Life-cycle funds are balanced funds in which the asset mix can range from aggressive (primarily marketed to younger investors) to conservative (directed at older investors). Static allocation life-cycle funds maintain a stable mix across stocks and bonds, while target-date funds gradually become more conservative as the investor ages.