Getting Started in Mutual Funds by Alvin D. Hall

Getting Started in Mutual Funds by Alvin D. Hall

Chapter 1
Definition and Structure of a Mutual
Fund
The concept underlying a mutual fund has probably existed since
securities were created. In its simplest form, it works as follows. A
group of individuals, with a similar investment objective or goal, place
their investment monies into a common pool. These funds are then used
to buy and sell securities. By pooling their money, the participants reap
two primary benefits. The first benefit is diversification. The collective
buying power of the group’s pooled resources enable it to purchase
shares or bonds in a broader range of industries or business sectors than
any individual in the pool could do on his or her own. The second
benefit is lower transaction costs per participant. Because the
commissions and other trading fees are spread over more shares and
more investors, the cost per person is usually much lower than it would
be if each individual had bought the same shares directly through a
brokerage firm.

mutual fund
commonly used name for an open-end management company that
establishes a portfolio of securities and then continually issues new shares
and redeems already outstanding shares representing ownership in the
portfolio.
Originally, one person, usually a contributor to the pool, was
designated by power of attorney or other legal means to select which
securities to buy and sell. Each person in the pool shared in the gains

and losses on the investments. Their percentage of gains and losses was
equal to their percentage of the participation in the pool.
investment objective
the strategy by which an investor wishes to increase the value of his or her
assets.
bull market
a period during which the overall prices of securities are rising.
These loosely run and unregulated pools were especially popular in
the United States during the bull market of the 1920s. In March 1924,
Massachusetts Financial Services created the first true mutual fund in
the United States. It was called the Massachusetts Investors Trust.
Following the market crash of 1929, Congress passed legislation
designed to give clearer structure to and better regulate the various type
of investment pools (also called investment companies). The Investment
Company Act of 1940 was the first U.S. law to define the different types
of pools.
investment company
generic name for one of the many companies, like a mutual fund, whose
primary business is investing and reinvesting in securities.
One of the types of investment companies defined in the Act is a
management company. It is a corporation or trust whose primary
business purpose is to invest and re-invest in securities in accordance

Getting Started in Mutual Funds by Alvin D. Hall