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Mutual Funds

Question: What is a Mutual Fund?

Answer: A mutual fund is a registered and professionally managed trust company that pools money from investors for the primary purpose of investing in securities, stocks, bonds, and other money market portfolios.

Question: Can this be explained in a more understandable way?

Answer: Yes. A mutual fund is a company that you allow to handle your money. The company takes your money, pools it with funds from other investors, and then seeks out the best way to invest all the funds in a safe and sound manner, giving you and each of the other investors an equal share of the profits, and the losses, generated by the investment.

Question: Are mutual funds safe?

Answer: Mutual funds are generally safe, but like all investments, there is risk involved and there is always the potential for loss. As an investor, you share any capital loss or capital gain with those who are included in the fund.

Question: How would I know how my money is being invested?

Answer: The funds investment objective has to be clearly stated in the company's prospectus and any changes has to be made through a vote by the investors or shareholders. A history of the funds actual returns has to be provided to the investors.

Question: Are there different types of mutual funds?

Answer: There are different types of mutual funds.

  1. Open end funds are those that are structured as corporations or business trusts.
  2. Equity funds are basically stock investments
  3. Exchange traded funds are funds in which shares are issued in large blocks by institutional investors.

Question: Are mutual funds taxed?

Answer: As long as most of it's income is distributed to it's shareholders, mutual funds are not taxed on generated income. Taxable income can be distributed as either capital gains or ordinary income. This depends largely on how the distributions were earned and passed through the shareholders.

Question: Would the funds be invested in only one instrument or would they be diversified?

Answer: Funds are normally invested in more than one investment vehicle at a time, from stocks and bonds to securities, technological companies, gold, and or any of many other options.

Question: Are mutual funds regulated by any government agency?

Answer: Yes. Mutual funds are regulated by the United States Securities and Exchange Commission (SEC). Laws require that Mutual Funds be registered with the Securities and Exchange Commission and require disclosures about the fund and the fund manager. The Internal Revenue Service (IRS) also has some input because of the favorable capital tax gain status of certain funds.

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