A mutual fund is an organization created to attract and use funds from private investors for the benefit of those investors. The funds received are invested in securities: stocks, bonds.

What is

A mutual fund is a portfolio of stocks collected and prepared by financial professionals and intended for subsequent resale to small individual investors.

Such funds arose a long time ago and still operate in Western countries. The first of them, Massachusetts Investors Trust, was created in the USA back in 1924. Mutual funds also exist in Russia, but they are called differently - mutual investment funds (UIFs). True, they appeared not so long ago, in the 90s of the last century, and due to well-known events, they do not have a very good reputation. But, despite everything, there are still many such organizations operating in Russia, and so far they are doing an excellent job with the task assigned to them.

Who can join

Any citizen can join a mutual investment fund. In Western countries, such an organization is similar to a pension fund. People invest money in these companies for a long time (20-30 years), and when they retire, they use this accumulated capital for personal purposes.

To become an investor, it is enough to sign an agreement with an investment fund and make an initial contribution. The process of transferring funds as monthly installments can be automated. The money will be transferred from the salary to the investor's account in the fund. To do this, you need to write an application and submit it to the human resources department or the management of the company in which you work.

Depending on the terms of the agreement, the return on each dollar invested can range from 10 to 40%, which is a very high figure, considering how low deposit rates exist not only in Western countries, but also in Russia.

Principle of operation

The operating principle of a mutual fund is based on mutually beneficial cooperation between the investor and the management of the organization. It lies in the fact that investors voluntarily contribute funds in order to receive income or preserve the funds they have. With this money, traders buy securities, shares of various companies, government bonds, from which an investment portfolio is formed. The investor is issued a document confirming his right to participate in the amount of the contribution made.

When and how can you get income from investments?

After a certain time, the invested funds, along with the profit, are returned to the investor. He may be paid a dividend or the proceeds from the sale of securities. The terms and conditions of payments depend on the terms of the agreement between the depositor and the institution.

For its services, the institution charges a commission of 0.3 to 1%. The percentage depends on the type of fund, its history and the conditions of access to financial instruments provided by financial institutions: banks, credit institutions, joint-stock companies.

Is there a risk of losing investment?

Since a mutual fund conducts risky transactions on the stock exchange and buys bonds, investors naturally fear that the fund may purchase the wrong securities and go bankrupt. This has happened more than once in human history. Such events are especially fresh in the memory of Russians, where many early mutual funds went bust. Unfortunately, even today there are fraudulent organizations under the guise of investment funds, so when choosing, you need to weigh the pros and cons.

How to secure capital

• You should only invest in old and time-tested organizations. Since most non-competitive funds “burst” back in 1997, there is no longer a big risk of losing savings. If you are not confident in domestic funds, you can invest in foreign ones. Thanks to the development of means of communication in our time, this has become possible.
• Study the financial statements of the funds. They, like any commercial organizations that issue shares, are required to publish financial statements on their website or on the stock exchange. An auditor's report must be attached to the financial statements. If the auditor expressed doubts in this document about the reliability of the financial statements, then you should not invest.
• Calculate your risk/reward ratio. The higher the profit, the higher the risk. But the risk must be justified. You should not invest money in new mutual funds that have an aggressive strategy to increase profits for the long term. Such institutions quickly appear on the market, but disappear just as quickly.

Stock trading remains a risky business. Funds help increase capital, but they do not eliminate the risk of losing an investment in the event of sudden changes in the stock market. They help investors, but do not relieve them of responsibility for the fate of the money invested.

Benefits of investing

If we compare independent investing on the stock exchange, in other financial institutions and investments in various funds, the latter have advantages:

• they have professional analysts on their staff;
• these organizations have access to information that is often inaccessible to a private trader or comes to him very late;
• they have access to risk insurance services that are not available to private individuals;
• they own significantly more capital than an individual citizen, and can invest heavily by purchasing shares in expensive companies.

To successfully trade on the stock exchange, you need to have special knowledge and be aware of the latest events in the economy, study the statements of hundreds of companies whose shares are listed there. This requires not only considerable funds for the purchase of expensive textbooks, but also free time to study them. Therefore, it is more profitable to invest in a fund and receive income from its work than to engage in trading itself.

How are they classified?

Mutual funds are classified according to the type of securities purchased and the purpose of investment.

• Funds created to increase capital. Such institutions specialize in purchasing securities whose prices will rise rapidly. Companies that issue such shares invest all funds received in their development. Therefore, they do not pay dividends to their shareholders. Investing in such stocks is a big but justifiable risk. If the company develops and becomes successful, capital growth can increase several times.
• Funds whose purpose is to increase income. They are in the business of buying stocks that pay the highest dividends or percentage of profits. The growth of the exchange rate of these securities is of secondary importance.
• Funds designed for capital growth and income. They have a strategy whereby their traders look for stocks that the investor can receive a dividend on, but at the same time, the value of these securities will increase.
• Balanced fund. This is an organization with a flexible trading strategy. It sells and buys shares of companies on the stock exchange, depending on the current market situation. In a financial crisis, the management of an institution may decide to convert some securities into others, for example, stocks into bonds.

In connection with the opening of other markets, in addition to the purchase and sale of shares and bonds, they are increasingly investing in foreign currencies. New money market mutual funds have opened that specialize in investment and speculative transactions in currencies.

What are the conditions for entry and exit?

In order to become a member of a mutual fund, it is enough to draw up an agreement with the relevant organization and make an initial contribution. In the future, depending on the conditions specified in the contract, you can make additional contributions monthly or as needed. The contribution amount depends on the investment policy of a particular fund.

It is as easy to leave such an organization as it is to enter, but only if it operates stably. That is, it is enough to come to the institution with a shareholder ID and passport to receive funds back with a profit. However, not all so simple. It all depends on the conditions specified in the contract. If you withdraw funds earlier, you may have to pay a fine or lose part of the income received.

In crisis situations, when there are an alarming number of people wanting to withdraw their money, the fund may suspend the return of funds to investors. Therefore, economists recommend investing only if the institution has been operating in the market for at least 3 years. Look for funds with a long history and be wary of scammers.

Where to start for an investor with small capital?

From annuity-type instruments: mutual funds.

A mutual fund or mutual investment fund is a portfolio of shares carefully selected and purchased by professional financiers with investments from many thousands of small investors. (c) Wiki

The funds are legally regulated in such a way that the non-exchange risks of an investor who has invested in these funds are virtually eliminated. Those. an investor can lose money if portfolio management is unsuccessful - however, the case of the management company escaping with the money thanks to a well-thought-out fund distribution scheme is impossible.

There are no guarantees of profitability, because investment funds are prohibited by law from promising any profitability; for this they will be deprived of their license. This is still a market; investments without risk do not exist in nature. The only indicator of reliability here can be the fund's return history. We take the average annual return for 5-10-20 years - this indicator can be fully counted on.

Therefore, mutual funds are the foreign standard for creating capital. They are simple for the investor. It is protected by law from non-exchange risks, and to protect itself from exchange risks, it is enough to contact your financial advisor to correctly assemble your portfolio.

The portfolio can be assembled very differently - from ultra-low risks (insurance contracts, Treasuries (US government bonds)) with a yield of 1-3%, to moderately risky with a yield of 10-20%. There are also aggressive strategies, but that’s a separate conversation.

Mutual funds are a universal instrument; they have been used abroad since childhood. The average American family has 2 investment accounts in such funds. Many parents, from the moment their child is born, invest a small amount every month so that by the age of 18 the child will have money for both education and an apartment.

Investing in mutual funds in developed countries is so popular simply because:
1. Investors are reliably protected by law.
2. People don't need to be investment experts. They entrust their money to funds managed by professionals with more than 20 years of experience. Investing in mutual funds requires virtually no time - just meet with your financial officer once a quarter. consultant and rebalance the portfolio.

In many countries, responsibility for creating pension capital is transferred from the state to mutual funds. The pension system is a financial pyramid. Current investors are paying for past generations. I think everyone has heard about the “aging population”. There are more people receiving payments than people contributing. In such a situation, the pyramid weakens and collapses. Providing for ourselves in old age is our personal responsibility, and mutual funds can be a great help in this task as well.

The largest, most famous, oldest mutual funds are companies such as BlackRock, Fidelity, Putnam Investments, The Vanguard Group, Franklin Templeton, JPMorgan Chase, Morgan Stanley, Allianz, Goldman Sachs and others.

They date back to the 1930s; the capitalization (the amount of investor money under management) of Franlkin Templeton alone is $800 billion. (For comparison, the entire annual turnover of the Russian Federation is $130 billion.) Why do people invest in these funds? Yes, simply because these mutual funds are time-tested and with their help you can easily receive 10-20% per annum in foreign currency. They survived all the crises of recent decades while preserving and increasing the capital of their investors.

The threshold for entry into these funds starts from $50,000. But we are talking about investments for a novice investor, right? For a yield of 10-20% and investor protection like in BlackRock.

There are companies that open the door to the largest mutual funds for investors with a couple thousand dollars in hand. The principle is very simple: for a certain commission, they accumulate small capital of investors in pools of $50,000 and send it to the world's largest funds.

That is, with only $2,000 capital on hand, you can actually invest in instruments of the Morgan Stanley level.

What kind of companies are these and how can you start investing with them?
We'll be talking about this until the end of the week!

Financial companies

Financial companies raise funds by issuing commercial paper or stocks and bonds and use the proceeds from their sale to make loans (often in small amounts) to meet the needs of consumers and businesses. The position of financial companies in the financial intermediary process can be described as follows: they borrow large amounts and provide loans in small amounts. This distinguishes them from commercial banks, which receive deposits in small amounts and often provide large amounts of loans.

A distinctive feature of financial companies is that, compared to commercial banks and savings institutions, their activities are virtually unregulated. States set maximum loan amounts available to individual consumers and the terms of the debt agreement. However, there are no restrictions on opening branches, holding assets or raising funds. The absence of such restrictions allows financial companies to better tailor loans to consumer needs than banking institutions.

There are three types of financial companies:

1. Finance companies that provide loans to consumers to purchase goods from small merchants or manufacturers. For example, Sears Roebuck Acceptance Corporation finances the purchase of all goods and services at Sears stores, while General Motors Acceptance Corporation finances the purchase of GM vehicles. These financial companies compete directly with banks to provide consumer loans and are used by consumers because such loans can be obtained faster and at the location where the goods are purchased.

2. Financial companies that provide loans for the purchase of individual goods, such as furniture or household appliances, for home renovation, or for the definancing of individual debts. These financial companies are individual corporations (such as Household Finance Corporation) or owned by banks (Citicorp owns Person-to-Person Finance Company) and operate nationwide. These companies primarily provide loans to consumers who cannot obtain credit from other sources and charge higher interest rates.

3. Financial companies that provide specialized forms of credit to firms by purchasing accounts receivable (amounts owed to the firm) at a discount. This form of loan provision is called factoring, or factor operations. For example, a clothing company has $100,000 in bills unpaid by the retail stores that purchased its clothing. If this company needs money to buy 100 sewing machines, then it can sell its receivables to, say, a financial company for $90,000, and after that it has the right to receive debts to the company for $100,000. In addition to factoring, such financial companies also specialize leasing equipment (such as computers, railroad cars, jet aircraft). They buy these capital goods and lease them to firms for a certain number of years.

Mutual funds

Mutual funds are financial intermediaries that pool the resources of many small investors by selling them shares and use the proceeds to purchase securities. It is through this process of asset conversion - issuing small denomination shares and purchasing large blocks of shares - that mutual funds can take advantage of discounts on brokerage commissions and purchase diversified holdings (portfolios) of securities. This allows small investors to benefit from low exchange costs when purchasing securities, as well as limit risk by diversifying their securities portfolio. Initially, mutual funds invested exclusively in common stocks, but many now specialize in debt instruments. The funds buy common stocks and can specialize even further and invest only in foreign securities or in specialized industries such as energy or high technology. Funds buy debt instruments and may specialize in corporate, U.S. government or tax-exempt municipal bonds, or long-term or short-term securities.

Based on their structure, mutual funds are divided into two types. The most popular are open-end funds, in which shares can be redeemed at any time at a price related to the value of the fund's assets. Mutual funds can also be closed-end funds, where a fixed number of non-redeemable shares are sold at an initial offer and then traded over the counter as common stock. The market price of these shares fluctuates with the value of the assets held by the fund. However, unlike an open-end fund, the share price of a closed-end fund may be higher or lower than the value of the assets held by the fund, depending on factors such as the liquidity of the shares and the quality of management. Open-end funds are more popular because their redeemable shares are highly liquid compared to the non-redemptible shares of closed-end funds.

At first, shares of most open-end mutual funds were sold by traders (usually brokers) who were paid a commission. Since commissions are paid upon purchase, they are immediately deducted from the redemption price of the shares. That's why these funds are called premium funds. Nowadays, most funds are non-premium funds, meaning they sell directly to buyers without deducting commissions. In both types of funds, managers earn their salaries from management fees paid by shareholders. These contributions amount to approximately 0.5% of the fund's asset value per year.

Mutual funds are regulated by the Securities and Exchange Commission, which is given nearly complete control over investment companies under the Investment Company Act of 1940. Regulation involves periodic disclosure of information about these funds to the public and restrictions on the methods of operation.

Money Market Mutual Funds

Money market mutual funds are a powerful addition to the family of mutual funds. This type of mutual fund invests in very high quality short-term debt instruments, such as Treasury bills, commercial paper, and bank certificates of deposit. Some fluctuations in the market price of these securities can be observed. However, since their maturity is usually less than six months, the change in market price is very small. Therefore, shares of such funds are purchased at a fixed price. (Changes in the market value of securities are included in the percentage that the fund pays). Because these shares can be redeemed at a fixed price, funds allow shareholders to redeem shares by writing checks over a certain minimum amount (usually $500) to the fund's account at a commercial bank. In this way, money market mutual fund shares effectively function as checkable deposits, earning market interest rates on short-term debt securities.

In 1977, money market mutual funds had less than $4 billion in assets. By 1980, this amount exceeded $50 billion, and currently stands at about $500 billion. Currently, the asset value of money market mutual funds exceeds half of all mutual fund assets. In Section 13, which examines financial innovation, you will learn that in the 1970s these funds had the highest growth rates among the group of financial intermediaries described.

Select the financial institution through which you will purchase mutual funds. To do this, carefully study your options and ask your friends or relatives who regularly invest in the market to recommend the best option for you.

• Online investing movies provide a wide variety of funds to choose from. They are suitable for investors who want to invest in mutual funds on their own. These investors will need to do their own research and closely monitor the placement and performance of their investments. Many online investment management companies have useful tools and sections to help new investors.
• If you have a larger portfolio, you may want to take the guidance of a professional. Financial advisors are usually paid hourly and given a deposit or a percentage of assets. By choosing this method, you will make it easier for yourself to select and keep track of each of the mutual funds in your different accounts.
• Banks and credit unions also sometimes offer the option of purchasing mutual funds. But they often charge more fees and/or commissions than financial advisors while providing a fairly limited selection of mutual funds to purchase. Some banks allow their clients to purchase funds only from their investment partners.