What You Need to Know

Investors looking to venture into financial markets have choices, including, among others, individual securities, bonds, and mutual funds. A mutual fund pools money invested by many participants to buy stocks, bonds, and other investments. Mutual funds offer both advantages and disadvantages compared to traditional investing. Some benefits could include:

  •       Potential to reduce risk by having a variety of stocks in the fund
  •       Liquidity
  •       Professional management
  •       Access to foreign markets
  •       Uniform information

Some potential drawbacks include:

  •       Management fees
  •       No direct control over the stock selection
  •       No direct control over income

For some investors, one attraction of a mutual fund may be implementing a pre-existing, stated investment strategy and adherence to risk objectives, removing the need for individual management.

Many Types of Funds Are Available.

There are open and closed-end funds and index funds, among others. An index fund is designed to mirror the performance of its benchmark, such as the S&P 500 or the DJIA. The index fund owns a representative sample of the stocks within the index it seeks to match and typically has lower expenses than some other active mutual funds, which may work more aggressively to outperform those indexes. Large-cap funds invest in companies with market capitalization of $10 billion or more, while mid-cap funds focus on companies in the $2 billion to $10 billion range, and small-cap funds buy shares of firms under $2 billion in market capitalization.

Mutual funds register with the Securities and Exchange Commission and provide financial details about their activities. Investors can typically buy and sell shares in publicly traded mutual funds at will for the net asset value (the value of the holdings divided by the outstanding shares). Mutual funds are also regulated by the Securities Act of 1933, the Investment Act of 1940, and FINRA (the Financial Industry Regulatory Authority). Various states also have oversight.

Many mutual funds are open-end, but some are closed-end. The main difference is that in an open-end fund, management may issue shares at any time. In a closed-end fund, the shares are typically issued at the outset and are subsequently traded between existing and new investors. Unlike the open-end fund, which trades at the net asset value, a closed-end fund will often sell at a discount (less than) or a premium (more than) the net asset value. This condition is a result of the fixed supply of shares available.

Evolution of Tender Offer Funds

Fund managers started offering tender offer funds in the late 1980s as a kind of hybrid option between open-end and closed-end funds. The SEC recognized and accepted the concept’s validity in a 1992 report1 and adopted Rule 13e-4 the following year to facilitate the tender offer practice.

The Rule allows the funds to employ generous latitude in conducting their repurchase offers, especially compared to the governance of similar interval fund offers. The funds do not need to perform the offers with any specific frequency, and the boards of directors can determine when and even if such offers will be made. The board of directors also controls the amount of such an offer. However, if a fund does establish in advance policies that direct the cadence of submissions, it must abide by those internal directives. When an offer commences, the fund will file Schedule TO with the SEC.

1SEC: Protecting Investors: A Half-Century of Investment Company Regulation


This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. A benchmark index is not actively managed, does not have a defined investment objective, and does not incur fees or expenses. Therefore, performance of a fund will generally be less than its benchmark index. You cannot invest directly in a benchmark index. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income. MUTUAL FUNDS
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Mutual Funds. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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