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Funds

There are a variety of investments in the “fund” category. Each has its own unique characteristics, which is important in understanding some of the advantages and disadvantages of each type. A brief overview of each is outlined below:

Open and Closed End Mutual Funds

Mutual funds invest their shareholder deposits based on their investment categories, such as: growth funds, growth and income funds, income funds, tax-free funds, or specific asset classes, such as: international, global funds, commodities, real estate, etc.

An “open-end” mutual fund is a fund that has no restriction on the amount of shares it may issue. As investors add money to the fund, the fund issues more shares, regardless of the number of investors. Alternatively, when an investor sells a share of the fund, the mutual fund company buys back those shares. Open end funds are valued only once per day. Buyers and sellers pay or receive their shares based on the value of the underlying holdings at the closing price the day the investment is made.

“Closed-end” mutual funds begin by raising a specific amount of money in an initial public offering of their shares (by issuing a specific number of shares). These funds considered “closed” because there are typically no more shares available once the initial capital is raised. Closed-end funds are usually actively managed by an investment advisor, who will buy a specialized portfolio based on the closed-end fund’s investment objective (i.e. dividend paying stocks, technology, bonds, focused on a specific country or region, etc.). A closed-end fund trades freely when the stock market is open, with it’s respective price driven by supply and demand, not necessarily the value of its underlying holdings. Sometimes a closed-end fund will trade for more than the value of the underlying shares (“a premium), or less than the value of its holdings (“a discount”).

Exchange Traded Funds (“ETF”)

In the simplest terms, an exchange traded fund is a security that tracks an index, like the S & P 500, commodities, such as oil, agriculture, and metals or a specific sector (i.e. fixed income, international bonds, energy companies, etc.). Until recently, ETF’s were known for their passive management style, and, for the most part, attempted to match performance of a well known index. Recently, actively managed ETF’s have begun trading, often times emulating a well known mutual fund and in some cases, are even managed by the same investment manager as the mutual fund. A few of the main attractions of an ETF are its low cost structure (primarily as it pertains to the passive, index tracking version of ETF’s) and tax efficiency. The way an ETF manages its purchase and redemption process is also unique and provides a very tax efficient way of managing redemptions and new investor money. Unlike open-end mutual funds, ETF’s are priced and trade throughout the trading day.

Each has its own degree of risk. Your Cutter & Company Financial Advisor can help you decide which funds are most suitable for your long-term investment goals.