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Running head: SIGNATURE ASSIGNMENT1Signature AssignmentIn the modern world, a mutual fund is one of the most popular investment vehicles. A mutual fund is a pool of money from a large number of people that strive to invest in a certain sector or product area. By choosing mutual funds, many investors waive purchasing individual stocks and bonds. The reasons that make this kind of investment opportunity so appealing are mainly professional portfolio management, dividends, risk reduction through diversification, convenience, and fair pricing. The biggest advantage of mutual funds is that they give small investors an opportunity to get involved in professionally managed, diversified portfolios of securities, which they could not, or could hardly, get access to as they have insufficient capital. All shareholders receive dividends proportional to their investments’ gains or losses. The new fund offers (NFO) or, in other words, the security offering in which the closed-end mutual fund markets its units are similar to initial public offering (IPO) of companies. The difference is that the NFO price paid is usually closer to a fair market value (Merkel, n.d.).However, the mutual fund is not a perfect investment for every investor. Mutual funds also include a number of disadvantages. One should pay attention to expense ratio and sales charges of a mutual fund. Some preferable mutual funds may have no sales charges at all. Management abuse is another drawback. It includes excessive replacement, selling unsuccessful positions before the quarter ends in order to fix the books, and unnecessary trading. Additionally,tax inefficiency and poor trade execution may reduce the attractiveness of a mutual fund.In order to determine whether a mutual fund’s performance is satisfactory and competitive, one should be able to define, calculate and compare the most expedient ratios. A lot of investors think that the NFO price of, for example, $30 per unit is low and they thus prefer NFOs to already established funds whose net asset value (NAV) is higher. However, mutual funds do not work similarly to stock markets, where demand and supply are main determiners of
SIGNATURE ASSIGNMENT2the stock price. The NFO price unit depends on the value of the underlying assets. Therefore, the