Mutual Funds
Funds are pooled investment vehicles managed by professionals who typically invest in a diversified portfolio of stocks, bonds, or other assets. They can be actively managed or passively track an index.
Mainstream retail funds operating in the UK – authorised funds such as an authorised unit trust or OEIC (open-ended investment company) are subject to product regulation governing the operation of the scheme, including investor disclosure, investment and borrowing powers and the valuation and pricing of the fund’s units/shares. These types of regulated funds include UK UCITS and Non-UCITS Retail Schemes (NURS). NURS may have slightly broader investment and borrowing powers.
These funds are open-ended. When investor wants to buy or sell units/shares in a unit trust or OEIC, the fund manager can create or cancel them to meet demand.
Regulated investment funds in the UK and across the EU may use similar terminology. Mutual Funds packaged for American investors are regulated by the SEC.
The main investment risks – e.g. market risks, credit risks, liquidity risks, currency risks and other performance risks – will generally reflect the nature of the portfolio and asset classes. Examples of other risks may include settlement risk and custody risks, where a fund makes investments in less developed markets. Some funds use derivatives as part of their investment strategy. This may be to reduce risk or cost or designed to enhance returns. Use of derivatives for investment purposes may increase the volatility of the fund performance.
Key Features of Funds
Diversification
Mutual funds invest in a wide range of assets, reducing the risk associated with individual securities
Professional Management
Fund managers can actively or passively manage the portfolio, aiming to achieve the fund’s investment objectives
Liquidity
Shares can be bought or sold at the end of each trading day at the fund’s net asset value (NAV)
Fees
Investors pay management fees and other expenses, which can vary depending on the fund
