A mutual fund is an investment product that acts as a delegated investment manager.
When an investor buys a mutual fund, the investor gives his cash to a financial management company that will use the cash to build a portfolio of assets according to the fund’s investment objective.
The objective includes the fund’s assets and investment strategy, and its management fees.
The fund’s assets can belong to a large number of asset classes such as equities, bonds, FX, real estate, and more.
The fund’s investment strategy refers to the style of investment, primarily whether the fund is actively managed or passively tracks an index.
An investor who puts money in a fund participates in both the appreciation and depreciation of the asset as allocated by the fund manager.
In order to covert one’s investment back to cash, the investor’s options depend on the type of fund.
There are two main types of mutual funds: open-end and closed-end funds.
Closed-end funds are mutual funds that are not redeemable. The fund issues a fixed number of shares usually only once, at inception, and investors can’t sell the shares back to the fund.
The fund initially sells the shares initially through an IPO and these shares are listed on an exchange where investors buy and sell these shares to each other.
Open-end funds are mutual funds with a varying number of shares. Shares can be created to meet the demand of new investors or destroyed (bought back by the fund) as investors seek to redeem them.
Some investment firms feel that the regulation imposed on mutual fund managers to ensure they fulfill their fiduciary duties to investors is too constraining.
The solution is the creation of hedge funds.
Hedge funds pursue more aggressive trading strategies and have fewer regulatory and transparency requirements. Because of softer regulatory oversight, access to these investment vehicles is largely limited to accredited investors, who are expected to better informed and able to deal with the fund’s managers.