Characteristics, Uses and Taxation of Investments - Pooled and Managed Investments


E. Pooled and Managed Investments: broadly defined, these are funds that pool investors' contributions to them. Professional investment managers invest the funds according to a particular strategy with certain objectives.

  1. Exchange Traded Funds (ETFs): [Noteworthy is that these are not to be confused with exchange funds, a vehicle used to unwind or monetize large concentrated stock positions. http://www.smithbarney.com/products_services/investor_education/ssb_university/exchng_funds.html. "Exchange funds allow investors a tax-free means to diversify a low-cost-basis and/or restricted stock position. Exchange funds allow investors to pool their low-cost-basis stocks in a fund. In exchange for contributing their stock to the fund, each investor owns a pro-rata share of the fund. After a set period of time - generally seven years - investors can redeem their interest in the fund. They will receive a non-taxable, distribution of a diversified pool of stock from the fund's portfolio. The value of this distribution is equal to the net asset value of their pro-rata interest in the fund at the time of the distribution. The stock distributed from the fund will retain in the aggregate the low cost basis of the stock originally contributed to the fund. There is always the possibility that the U.S. tax code could change, disallowing the favorable tax treatment of exchange funds. These changes could be retroactive, although this is believed to be unlikely." The reader will find a more detailed discussion of strategies used to diversify concentrated stock positions in Chapter Nine of the Investment Planning section of the study guide entitled "Asset Allocation and Portfolio Diversification".]: these are publicly traded, passively managed funds which track the performance of an index, sector or region. They may be purchased on margin and sold short without being subject to the uptick rule. Because these are index type funds, their expense ratio is quite low. Additionally, because of their passive nature, turnover is quite low resulting is fewer taxable distributions than most mutual funds. A form of closed end fund, redemption is accomplished through sale on an exchange rather than from tendering units to a mutual fund company. Because they throw off little income, exchange-traded funds may be more suitable for taxable accounts, though the tax decision is but one consideration of an investor's policy considerations.
  2. Unit Investment Trusts: these are registered investment companies that are liquidate themselves, are passively managed and may invest in equities, fixed income or other securities. The units generate dividend and interest income and principal as fixed income securities mature. Securities selected for inclusion in the trust are held to maturity.
  3. Mutual Funds: a mutual fund is an investment company that pools money from shareholders and invests in a diversified portfolio of securities [Pozen, Robert C. The Mutual Fund Business, The MIT Press 1998 p.16]. A type of management investment company, mutual funds manage the portfolio either actively through the selection of securities according to a specified discipline or passively by tracking an index of securities.
    1. Mutual fund essentials
      1. Mutual funds are one of three types of investment company.
        1. Unit Investment Trust
        2. Closed-End
        3. Open-End (mutual fund)
      2. Investment companies are non-taxable, conceptually similar to partnerships and subchapter S corporations in terms of their tax treatment in that they pass through interest income, dividends and capital gains to the shareholders in the fund. Qualifications for the investment company to meet to maintain favorable tax treatment include
        1. The investment company needs to earn at least 90% of its income from interest, dividends and capital gains on the securities in which it invests.
        2. The investment company must distribute at least 90% of its taxable income to its shareholders.
        3. Not more than 25% of the value of the fund's total assets may be invested in the securities of one issuer.
Mutual Fund Expenses


Related Articles
  1. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  2. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Mutual Funds

    What they are: A professionally managed pool of stocks, bonds and/or other instruments that is divided into shares and sold to investors. Pros: Diversification; liquidity; simplicity; ...
  3. Mutual Funds & ETFs

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  4. Mutual Funds & ETFs

    Mutual Funds

    Mutual Funds introduction
  5. Mutual Funds & ETFs

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  6. Mutual Funds

    What mutual funds are: Professionally managed pools of stocks, bonds and/or other instruments that are divided into shares and sold to investors. Pros: Diversification; liquidity; simplicity; ...
  7. Mutual Funds & ETFs

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  8. Mutual Funds & ETFs

    Mutual Funds: Different Types Of Funds

    No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North America! That means ...
  9. Investing Basics

    4 Expensive Mutual Fund Mistakes to Avoid

    Mutual funds are a good way to balance your asset allocation but there some potentially expensive pitfalls investors need to be aware of.
  10. Mutual Funds & ETFs

    Mutual Funds: What Are They?

    The Definition A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money ...
RELATED TERMS
  1. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  2. Investment Company

    A corporation or trust engaged in the business of investing the ...
  3. Fund Company

    A commonly used term to describe an investment company, which ...
  4. Equity Fund

    A mutual fund that invests principally in stocks. It can be actively ...
  5. Pooled Funds

    Funds from many individual investors that are aggregated for ...
  6. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
RELATED FAQS
  1. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  2. How often do mutual funds pay capital gains?

    Find out how often mutual funds distribute capital gains income, including the basics of how mutual funds work and why frequent ... Read Answer >>
  3. Do mutual funds pay interest?

    Find out how and why some mutual funds pay interest, and which types of funds make regular dividend distributions to shareholders ... Read Answer >>
  4. Do mutual funds pay dividends or interest?

    Learn how and why mutual funds pay interest or dividends, including the different funds and which types generate each type ... Read Answer >>
  5. How can I find tax-exempt mutual funds?

    Learn about finding tax-free mutual funds at major investment firms, including how tax-free funds work and what you should ... Read Answer >>
  6. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center