Exclusive Mutual Fund article

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A mutual fund (in the United States) or unit trust (in the United Kingdom) raises funds from the public and invests the funds in a variety of financial assets, mostly equity both domestic and overseas, and also in liquid money and capital market instruments. Bothunit trusts and mutual funds grew enormously in both number and value of assets under management in the 1980s and 1990s. In the United Kingdom unit trusts are based largely upon equity investment, whereas in the United States mutual funds are also extensively involved in bonds and money market instruments.
             
The growth in the popularity of mutual funds/unit trusts can be accounted for by the fact that as incomes have grown investors have been more willing to consider alternative forms of financial investment than traditional savings accounts. Another reason for their popularity is that they provide a relatively low-cost method for private investors to achieve portfolio diversification since the fund can reduce contracting and information costs. In addition, investors know that the fund is being professionally managed and the composition of shares is constantly adjusted to reflect new profit opportunities. Fund managers make money on the bid–ask spread which is usually well below 5 per cent, and on the basis of an annual management fee which is typically in the region of 0.5–1 per cent of the funds under management. The loss of deposits to many unit trusts has encouraged many commercial banks to set up their own mutual funds/unit trusts. 

According to the investment company institute (www.ici.org) the initial upfront fee for a stock based mutual fund fell from 2.32% in 1980 to 0.99%in 2008 while for bond funds it fell from 2.05% to 0.75%.

Investors in a mutual fund/unit trust have the potential to gain in two ways: (i) they are entitled to a share in the capital appreciation of the underlying assets, and (ii) they have a claim on the income generated by the underlying assets of the fund. Another attraction of investing in unit trusts is that they are run by professional fund managers who constantly monitor investment opportunities and adjust the composition of their portfolio to reflect this.
            
A typical mutual fund/unit trust is set up via a sale of units to the public, and the advert for the sale will specify the objectives of the fund.These vary, some funds seek high yield but are relatively risky, others seek lower but more stable yields. Some are concerned with income generation while others aim for capital growth. These days there is an enormous variety of mutual funds/unit trusts and many have specialist interests, such as investment in emerging markets such as East Asian funds, Latin American funds, European Funds, South Korean funds and so on. Another popular theme has been the emergence of sectoral funds that track a portfolio of firms in a particular sector of the economy, for example, technology stocks, smallecompany stocks and so on. There are also index-linked funds which closely track the returns of a specific index such as the FTSE 100, or Standard and Poor 500. Since mutual funds/unit trusts need to be valued on a daily basis, they restrict the vast majority of their investments to listed securities whose value is publicly listed each day. 
             
Units are typically advertised at a certain price, for example $1 per unit. If $10 million of stock is applied for then the $10 million is raised and invested in assets and each shareholder receives a number of units; someone who subscribes $5,000 will be given 5,000 units and someone who subscribes $20,000 will receive 20,000 units. As the value of the assets invested in by the fund changes, then so do the unit prices which are calculated (approximately) as the total value of the fund divided by the number of units issued. Income received from ownership of the underlying assets in the way of dividends, interest and so on is then paid out to unit holders in accordance with the number of units
owned.
             
Most mutual funds/unit trusts are‘open ended’, that is, new investors can join the fund at any time. If the inflow of funds from new investors exceeds the outflow of funds due to sales by existing investors, then new units are brought into existence at the existing market price. For example, if the current market price of units is $2 and $100,000 of net funds is received, then 50,000 new units are created. One important aspect of mutual funds/unit trusts is that investors can only sell their holding back to the fund management company at the current market price, there is no secondary market in mutual funds.

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