What is a Mutual fund and Why Do You Need It
The Need for Mutual Funds
Many investors lack the necessary time and knowledge to properly manage their securities portfolios. Mutual funds are designed to solve this problem. What are Mutual Funds? Mutual funds are established and managed by securities experts. Starting a mutual fund is actually very much like founding a company. A group of investors pool their money, hire a fund manager (fulfilling the role of the manager of a company), and appoint a trustee to supervise the manager (similar to the functions of a board of directors). Also, they will maintain the interests of the owners of units in the fund (similar to a company’s shareholders).
Establishing a Mutual Fund
Not everyone is permitted to establish and operate a mutual fund. A comprehensive set of regulations protects the funds of investors in mutual funds.
The Approval Process
In the United States, establishing a mutual fund requires authorization from the SEC (Securities and Exchange Commission). In order to obtain such authorization, an entity must prove its credibility and professionalism. It must also submit periodic reports and publish a prospectus in relation to the offer of participation units in the mutual fund to the public. A trustee must be appointed to supervise the fund manager.
Naming the Mutual Fund
The name of the mutual fund is usually determined by the name of the company operating that fund and the fund’s range of investment.
The Fund’s Bank Account
The fund trustee opens a bank account, which is called the fund's account. The money invested by the public in the fund’s units is deposited into that account. The fund manager is granted Power of Attorney authorizing him or her to withdraw money from that account in order to purchase securities, and to deposit money obtained by selling the securities. Investors wishing to join the fund purchase participation units in the fund on the stock exchange. Their money is deposited into the fund's bank account. The investors receive participation units in return representing their shares of the fund. The money in the fund belongs to the owners of these units, and not to the fund manager. The fund trustee verifies that the fund manager does not misuse the money deposited in the bank account. Like other bank accounts, the fund's account is usually split into two sub-accounts: 1. A current account 2. A securities account (including foreign currency) The fund’s cash is kept in the current account. When the fund manager buys securities, money is withdrawn from the current account, and the securities are deposited into the securities account.
Choosing a Trustee
Every mutual fund must appoint a trustee. The trustee is usually a bank or accounting firm. The trustee monitors the fund to assure that the fund manager obeys the appropriate regulations.
Restrictions on the Fund Manager
A fund manager can use the money in the fund’s bank account only to buy and sell stocks, and within the scope of his professional discretion. He cannot withdraw funds from the account for other purposes. He is subject to the restrictions stipulated by the fund's prospectus.