Mutual funds have advantages and disadvantages compared to direct
investing in individual securities. Advantages of mutual funds include
economies of scale, diversification, liquidity, and professional
management. However, these come with mutual fund fees and expenses.
Not all investment funds are mutual funds; alternative structures include unit investment trusts, closed-end funds, and exchange-traded funds
(ETFs). These alternative structures share similarities such as
liquidity due to trading on exchanges and, in the United States, similar
consumer protections under the Investment Company Act of 1940.
Mutual funds are also classified by their principal investments as money market funds, bond or fixed income funds, stock or equity funds, hybrid funds or other. Funds may also be categorized as index funds, which are passively managed funds that match the performance of an index, or actively managed funds. Hedge funds are not mutual funds as hedge funds cannot be sold to the general public and lack various standard investor protections.
United States
In the United States, the principal laws governing mutual funds are:
- The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the SEC and that they provide potential investors with a prospectus that discloses essential facts about the investment.
- The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors; this act also created the Securities and Exchange Commission, which is the principal regulator of mutual funds.
- The Revenue Act of 1936 established guidelines for the taxation of mutual funds. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code; instead, the taxable income is passed through to the investors in the fund. Funds are required by the IRS to diversify their investments, limit ownership of voting securities, distribute most of their income (dividends, interest, and capital gains net of losses) to their investors annually, and earn most of the income by investing in securities and currencies.The characterization of a fund's income is unchanged when it is paid to shareholders. For example, when a mutual fund distributes dividend income to its shareholders, fund investors will report the distribution as dividend income on their tax return. As a result, mutual funds are often called "pass-through" vehicles, because they simply pass on income and related tax liabilities to their investors.
- The Investment Company Act of 1940 establishes rules specifically governing mutual funds. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations.
- The Investment Advisers Act of 1940 establishes rules governing the investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.
- The National Securities Markets Improvement Act of 1996 gave rulemaking authority to the federal government, preempting state regulators. However, states continue to have authority to investigate and prosecute fraud involving mutual funds.
Open-end and closed-end funds are overseen by a board of directors, if organized as a corporation, or by a board of trustees,
if organized as a trust. The Board must ensure that the fund is managed
in the interests of the fund's investors. The board hires the fund
manager and other service providers to the fund.
The sponsor or fund management company, often referred to as the fund manager, trades
(buys and sells) the fund's investments in accordance with the fund's
investment objective. Funds that are managed by the same company under
the same brand are known as a fund family or fund complex. A fund
manager must be a registered investment adviser.
European Union
In the European Union, funds are governed by laws and regulations
established by their home country. However, the European Union has
established a mutual recognition regime that allows funds regulated in
one country to be sold in all other countries in the European Union, but
only if they comply with certain requirements. The directive
establishing this regime is the Undertakings for Collective Investment in Transferable Securities Directive 2009, and funds that comply with its requirements are known as UCITS funds.
Canada
Regulation of mutual funds in Canada is primarily governed by
National Instrument 81-102 "Mutual Funds", which is implemented
separately in each province or territory. The Canadian Securities
Administrator works to harmonize regulation across Canada.
Money market funds
Money market funds invest in money market
instruments, which are fixed income securities with a very short time
to maturity and high credit quality. Investors often use money market
funds as a substitute for bank savings accounts, though money market funds are not insured by the government, unlike bank savings accounts.
In the United States, money market funds sold to retail investors
and those investing in government securities may maintain a stable net
asset value of $1 per share, when they comply with certain conditions.
Money market funds sold to institutional investors that invest in
non-government securities must compute a net asset value based on the
value of the securities held in the funds.
In the United States, at the end of 2018, assets in money market funds were $3.0 trillion, representing 14% of the industry.
Bond funds
Bond funds invest in fixed income or debt securities. Bond funds can be sub-classified according to:
- The specific types of bonds owned (such as high-yield or junk bonds, investment-grade corporate bonds, government bonds or municipal bonds)
- The maturity of the bonds held (i.e., short-, intermediate- or long-term)
- The country of issuance of the bonds (such as U.S., emerging market or global)
- The tax treatment of the interest received (taxable or tax-exempt)
In the United States, at the end of 2018, assets in bond funds (of
all types) were $4.7 trillion, representing 22% of the industry.
Stock funds
Stock or equity funds invest in common stocks. Stock funds may focus on a particular area of the stock market, such as
- Stocks from only a certain industry
- Stocks from a specified country or region
- Stocks of companies experiencing strong growth
- Stocks that the portfolio managers deem to be a good value relative to the value of the company's business
- Stocks paying high dividends that provide income
- Stocks within a certain market capitalization range
In the United States, at the end of 2018, assets in stock funds (of
all types) were $11.9 trillion, representing 56% of the industry.
Funds which invest in a relatively small number of stocks such as
fewer than 50 are known as "focus funds"; these funds may also be activist investors and alternative investments.
Hybrid funds
Hybrid funds invest in both bonds and stocks or in convertible securities.
Balanced funds, asset allocation funds, target date or target risk
funds, and lifecycle or lifestyle funds are all types of hybrid funds.
Hybrid funds may be structured as funds of funds,
meaning that they invest by buying shares in other mutual funds that
invest in securities. Many funds of funds invest in affiliated funds
(meaning mutual funds managed by the same fund sponsor), although some
invest in unaffiliated funds (i.e., managed by other fund sponsors) or
some combination of the two.
In the United States, at the end of 2018, assets in hybrid funds were $1.4 trillion, representing 7% of the industry.
Other funds
Funds may invest in commodities or other investments.
Mutual funds today
At the end of 2018, mutual fund assets worldwide were $46.7 trillion, according to the Investment Company Institute. The countries with the largest mutual fund industries are:
- United States: $21.0 trillion
- Luxembourg: $4.7 trillion
- Ireland: $2.8 trillion
- Germany: $2.2 trillion
- France: $2.1 trillion
- Australia: $1.9 trillion
- Japan: $1.8 trillion
- China: $1.8 trillion
- United Kingdom: $1.7 trillion
- Brazil: $1.2 trillion
In the United States, mutual funds play an important role in U.S.
household finances. At the end of 2018, 21% of household financial
assets were held in mutual funds. Their role in retirement savings was
even more significant, since mutual funds accounted for roughly half of
the assets in individual retirement accounts, 401(k)s and other similar
retirement plans.In total, mutual funds are large investors in stocks and bonds.
Luxembourg and Ireland are the primary jurisdictions for the registration of UCITS funds. These funds may be sold throughout the European Union and in other countries that have adopted mutual recognition regimes.
- Aberdeen Asset Management
- AIM (Invesco)
- AllianceBernstein
- Allianz
- Amana Mutual Funds Trust
- American Beacon
- American Century
- American Funds (The Capital Group Companies)
- Ariel Investments
- Ave Maria Mutual Funds
- Barclays Global Investors
- Baron Funds
- BlackRock
- BNY Mellon (The Bank of New York Mellon)
- Calamos
- Calvert Investments
- Columbia (Ameriprise Financial)
- Credit Suisse
- Dimensional Fund Advisors
- Delaware Investments
- Dodge & Cox
- Dreyfus
- Eaton Vance
- Federated
- Fidelity
- First Eagle Funds
- Franklin Templeton
- Gabelli & GAMCO Funds
- Goldman Sachs
- Invesco (AMVESCAP)
- Janus
- JPMorgan
- Legg Mason
- MainStay Investments
- Mellon Funds
- MetLife
- MFS
- Morgan Stanley
- Natixis Global Asset Management
- Northern
- Old Mutual
- PIMCO (Pacific Investment Management)
- Pax World
- Pioneer Investments
- Putnam
- Schwab
- State Farm
- State Street
- Thrivent Financial for Lutherans
- TIAA-CREF
- T. Rowe Price
- Truist Financial
- Tweedy, Browne
- USAA
- Value Line
- Vanguard
- Van Kampen
- Virtus Investment Partners
- Waddell and Reed
- Wells Fargo Funds
- Wilshire Associates
