Mutual Funds: Its Activities

A good many people enjoy following the stock market, studying brokers’ research reports, and making their own investment choices. They boast about the winners and keep quiet about the losers. Others, who want to invest in common stocks, because they hope for a better yield than they can get on fixed-income securities, find the task of investment management an onerous one. Wealthy people can afford to pay investment counsel and can buy a diversified portfolio of stocks without paying too much in brokerage charges. People with $ 10 or $ 20 thousand to invest in stocks cannot afford to pay too much for investment advice and find it difficult to get a diversified portfolio. Mutual funds answer their problem.

Common-stock mutual funds issue shares at, say, an initial price of $ 100 share. They invest the proceeds, less a commission, in common stock. The value of the funds’ shares fluctuates with the fortunes of the stocks held by the fund. The Net Asset Value (NAV) of a share is computed daily. After the initial offering the fund stands ready to sell new shares at the same price. When new sales exceed redemptions the fund buys additional stocks; when redemptions exceed new sales the fund must sell some of its holdings. The commission mentioned above is called a loading and usually runs about 4 percent. Most of the loading charge is used to pay commissions to brokers and other selling expenses. Many funds do not charge any loading. These no-load funds pay no sales commissions and spend little on advertising. Mutual funds are managed by professional money managers.

The investment managers get an annual fee, usually one-quarter percent to one-half percent of asset value. The remainder of dividends earned is paid to the holders of the fund’s shares. If it pays out all dividends, the fund need not pay income taxes, but its shareholders must pay income tax on the dividends they receive. If the fund sells stock at a profit, it pays out a capital gains dividend, taxable to the fund’s shareholders at capital gains rate.

Mutual funds provide a good example of the functions of intermediaries. Since they operate on a relatively large scale, they can provide professional investment management at relatively low cost per dollar invested. They can also manage and monitor a diversified portfolio to reduce risk at relatively low cost in management and brokerage charges.

A number of stock-market studies question the value of professional investment advice. There is no proof that any fund management can beat the market averages. However, few investors can buy all the stock in Standard & Poors five-hundred-stock index, much less the fifteen hundred in New York Stock Exchange index. Whatever the merits of fund managements, they attract a continuing flow of funds from investors who want stocks but do not want to either throw darts or spend a lot of time and effort choosing investments.

They are a variety of types of fund. Some announce that they will invest for growth and capital gains. They do not say so but their shares involve a relatively high risk of loss as well as a chance of big gains. At the other end of the spectrum, balanced funds buy a variety of securities including bonds as well as a stable dividend stocks and some growth stocks.

Though they have grown rapidly since the World War II and have assets over 100 billion dollars, stock mutual funds still own only about 5 percent of all common stock. Nonetheless, they provide an opportunity for equity investment to a large number of people, who would otherwise find it difficult to participate in the equity market.

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