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Mutual Fund Management

To understand how management of a mutual fund takes place, first we need to understand who manages a fund. Mutual funds are operated much like a typical company in terms of layers of management, although differing titles for these positions is common. Within a mutual fund you will find a board of directors, an investment advisor, underwriters, dealers, a custodian, a transfer agent, and an auditor. All levels of the mutual fund play crucial roles in providing a fund that experiences success in terms of fulfillment of the fund's stated objectives and each role is described below.

The board of directors are elected by shareholders of the mutual fund and must not include more than 60% of individuals affiliated with the sponsoring investment company. The other 40% must be comprised of individuals outside of the fund and with no affiliation with the fund. This board of directors is responsible for setting policies which guide management of the fund. The board, however, does not engage in direct management of fund assets, as this is the job of the investment advisor appointed by the board of directors. The investment advisor that is appointed by the board of directors is charged with meeting investor expectations by selecting appropriate securities for the fund's portfolio. While the investment advisor is free to chose what ever securities he or she so wishes, they must adhere to the funds stated objectives found in the fund's prospectus.

An underwriter or sponsor is typically the investment company that manages the fund by purchasing shares in the fund at the net asset value and then selling those shares to the public usually at a higher price called the public offering price. Advertising and selling costs are passed on to shareholders if the fund is classified as a 12b-1 fund. If the fund is not a 12b-1 fund, advertising costs are to be absorbed by the underwriter. Occasionally underwriters will outsource the marketing of shares to dealers. Dealers purchase shares from the underwriter and sell them to the public at a higher price; it is prohibited for dealers to purchase shares for their own gain.

The Investment Company Act of 1940 provides assurance that the governing of a mutual fund is not centered among few individuals. This act plays a large role in protecting shareholders from unscrupulous individuals "dipping into the cookie jar". The act calls for a transfer agent, a custodian, and an auditor to be involved with the mutual fund.

The role of a transfer agent calls for canceling redeemed shares and issuing new shares. The transfer agent will also be involved with issuing dividends produced by the fund's assets, receiving payments from investors and disbursing those payments. A custodian, typically a financial institution such as a bank, will provide safe keeping of the fund's cash and certificates of the fund's assets. An audit of the funds assets and liabilities is to be completed by an auditor at least 2 times every years. After every audit, a biyearly report is published and furnished to shareholders for review.

Now that you have an understanding of a mutual funds inner workings you should know what you are paying for in terms of the fees associated with a mutual fund. Read about where your money goes, who collects which fees, and how much in Mutual Fund Fees.

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