LOUISE FAIRSAVE: Mutual funds may differ

THERE ARE different types of mutual funds. The prospectus for them sets out the specifics of the fund.

For example, the minimum initial investment of one mutual fund may be $500 whereas that of another may be $10 000. In addition, the minimum amount for making additional investment in the mutual fund may also be prescribed and differ between funds.

The lower the minimum initial investment required and the minimum amount for adding to the investment, the more accessible is the fund to the man in the street. 

The prospectus for the mutual fund also sets out the investment portfolio strategy of the fund. For example, one mutual fund may set out a strategy of choosing investments in local and regional stocks and debt securities, whereas another fund may choose to invest mainly in commercial real estate. 

Typically, the prospectus will describe the planned investment strategy and possibly provide projections of the expected returns on the investment. 

The prospectus may also present brief biographical descriptions of the investment manager(s), directors and officers of the fund.

Another very major factor is whether it is a closed-end fund or an open-end one. For a closed-end mutual fund, investors buying into the fund may only purchase new shares through subsequent share offers by the mutual fund. Alternately, investors may increase their shareholding by purchasing shares of existing shareholders that have been offered for sale on the stock exchange. 

Closed-end mutual fund shares are not ordinarily redeemable by the company. They are structured as publicly traded shares on the stock market. As an investor, if you want to sell your shareholding, you will have to offer it for sale on the stock exchange. 

When selling shares of a closed-end mutual fund, there is no guarantee as to the timing of the sale. It will depend on the interest of potential buyers. 

Similarly, there is no guarantee as to the price at which the shares will be sold. The liquidity of the shares will depend on the open market response to the shares being sold.

A closed-end fund should not be confused with a closed mutual fund. Any mutual fund may be closed temporarily or permanently to new investors if the fund manager finds that the size of the overall fund (the asset base) is becoming too large for the planned investment strategy.

An open-end mutual fund is obligated to repurchase the shares at a price that reflects the prevailing net asset value of the fund. The shares of such a mutual fund are described as redeemable. Typically, the sale of shares held in such a fund can be realised within a few days. 

A mutual fund may also provide dividend payments to its shareholders, particularly for a mutual fund which has invested in companies which in turn pay dividends. 

Mutual funds present an attractive proposition for the man in the street, the investment neophytes, as well as for people who do not care to take the time to study the market and take on the investment risks themselves. 

Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: LouiseFairsave @nationnews.com

This column is sponsored by the Barbados Workers’ Union Co-op Credit Union. Credit Union Ltd.