Mutual funds offer a number of services to investors for which investors pay a management fee
and administrative expenses. The services include professional investment management, cost
reduction due to economies of scale, automatic record keeping, special services such as automatic
investment plans, and investment flexibility. The sum of the management fees and administrative
expenses is referred to as the MER (Management Expense Ratio). Administrative expenses are
also referred to as Management Expenses.
Investment funds, of which mutual funds are just one type, have a long history dating back to
the 19th century. The earlier types of funds are fixed trusts and closed-end investment funds.
Fixed trusts are unmanaged portfolios of debt securities that all reach maturity at the same time.
Fixed trusts, therefore, have limited lives and they are not a common type of investment today.
Closed-end investment funds are corporations that are in the business of investing in securities.
The capital of these companies is relatively fixed. Shares of these companies are bought and sold
like the stock of any other type of company. Mutual funds differ from closed-end funds in that
their capital is unlimited. In addition, investors buy and sell shares of mutual funds only from the
mutual fund itself and not from other investors. There is no secondary market for mutual fund
units, since they all trade on the primary market.
There are a number of basic mutual funds. These include money market funds, fixed-income
funds, balanced funds, common equity funds, and different types of specialized funds. Each fund
is characterized by the different types of securities making up its investment portfolio and in the
risk and return characteristics of those securities. Over the 20-year period from 1991 to 2010, the
volatility characteristics of money market, bond, and equity mutual funds have shown the same
patterns as the individual securities making up their portfolios; that is, money market funds are
less volatile than bond funds, which are less volatile than equity funds.
Volatility results from the interplay of many risk factors. These risks include unique risk, market
risk, interest rate risk, default risk and exchange rate risk for foreign investments.