When people refer to mutual funds they are most often referring to ‘open-end’ mutual funds in which investors buy and sell shares on a regular basis. Most mutual funds have active managers who, with their teams, make decisions as to the fund holdings which correspond to the fund’s stated objectives. These objectives are often growth, income, international exposure, etc. What many people don’t realize is that similar products exist which may be able to achieve a similar objective but at a lower cost. For example, closed-end funds are out there along with unit investment trusts.* Let me explain each:
Closed-end funds sell a fixed number of shares at one time (generally referred to as the initial public offering) and then trade in a secondary market in which investors can buy the fund intraday similar to a stock. While it trades like a stock, closed-end funds generally own a basket of securities with varying objectives similar to a mutual fund. Closed-end funds have their own set of potential advantages and disadvantages which should be fully explored prior to making a purchase.
Unit investment trusts (UITs) also have initial public offering in which a fixed number of redeemable securities (referred to as units) are issued. However, unlike a mutual fund or closed-end fund, UITs terminate on a stated date in which the investor gets his/her money back, hopefully but not necessarily worth more than what it did on the purchase date. Like a mutual fund, UITs have stated objectives which range from growth and income to specific sector exposure. They are used both as speculative tools and as core holdings. One might choose a UIT if they believe a certain market sector will outperform over the course of one year. At the end of that year, the UIT will convert back to cash, allowing the investor to either change their investment strategy or reinvest the proceeds into the safe or a different UIT.
Perhaps the most noticeable, differentiating characteristic of mutual funds is that each fund is its own trust, in which shares are purchased and redeemed at 4:00 each day. You can’t buy or sell shares in a mutual fund until the close of market. This is convenient in that it may prevent investors from making market timing errors but inconvenient in that you have no liquidity intraday (between 9:30 – 4:00 when the market is open).
It’s good to at least have knowledge of these mutual fund alternatives. In an era where active mutual fund performance is questionable and fees and transparency are all the rage, some find their exposure to mutual funds diminishing quickly. Speak to your broker or advisor to become more educated about these product alternatives.
Premier Financial Advisors, Inc
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New York, NY 10022
P: 212-752-4343 Ext 231
*Closed-end funds may trade at a discount or premium to their net asset value. Unit Investment Trusts may be subject to a deferred sales charge is sold before the stated termination date. Closed-end funds are considered specialized funds (non-diversified) and therefore carry additional risks, may trade in the secondary market, may be illiquid and have a long-term time horizon.
Investing in mutual funds involves risk, including possible loss of principal.
Investing in UITs is a long-term strategy with tax consequences so investors should consider their ability to continue investing in successive trusts.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.