Securities: Mutual Funds

A Mutual Fund is: a fund operated by an investment company which raises money from shareholders and invests in a group of assets in accordance with a stated set of objectives.

Mutual funds raise money by selling shares of the fund to the public, much like any other type of company that sells stock in itself to the public. Mutual fund managers then take the money they receive from the sale of their shares and purchase various investment vehicles, such as stocks, bonds and money market instruments.  

In return for the cash the investor places in the fund when purchasing shares, the shareholder receives an equity position in the fund and, in effect, in each of the funds’ underlying securities.

Benefits of Mutual Funds

  1. Diversification. Mutual funds spread risk by investing in more vehicles than you'd be able to as one individual.
  2. Less volatility. The diversification makes the fund's performance much less volatile than investing in single sources.
  3. Professional management. You can be as removed from the day-to-day performance as you like.
  4. Choice & convenience. There are more mutual funds than there are stocks. (And, yes, sometimes this can cause confusion. But the choices are out there.)
  5. Liquidity. Generally speaking, fund holders can get money out at any time.

Notes of caution:

  1. Fees are charged, and these amounts vary widely.
  2. Often a minimum investment amount is required. Generally, future investments by the same shareholder (dollar cost averaging) may be significantly smaller.

For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily depending upon the performance of the securities held by the fund.

When making a gift from a mutual fund:

  1. The donor must contact their fund administrator, follow their instructions and complete their required paperwork.
  2. You should advise the donor that it may take 4 to 6 weeks to complete a gift to your organization from a mutual fund.
  3. The transfer of the funds is accomplished by the fund administrator and neither the donor nor the charity can influence their process or the speed of their transfer process.
  4. Remind the donor that a) the shares need to have been held at least a year, and b) the shares need to have appreciated in value.
  5. The gift does not take place until the funds reach the account of the charity.

Tax Savings through Gifting from Mutual Funds

Let's say a donor gifts $100,000 from a mutual fund. Meanwhile, her adjusted gross income (AGI) for the year is $50,000.

Just as for gifts of stock and other appreciated assets, the tax deduction for gifts from mutual funds is limited to 30% of the donor's AGI.

So, even though this donor is entitled to a $100,000 charitable deduction in the year the gift is made, she can only claim $15,000 (30% of $50,000) as a deduction.

Assuming her marginal tax rate is 21%, she would reduce her tax liability by $15,000 X 21% = $3,150.

The balance of that $100,000 deduction ($85,000) can be carried forward for an additional 5 years.

(Reminder: cash gifts can be deducted up to 50% of AGI.)

There are so many types of mutual funds.

Research is needed to be accomplished before investing in a fund. Key things to review:

  • Who is the fund manager and what is their track record? Review 5- and 10-year (or longer) returns on the fund. The past is never a predictor of the future, but you can get a sense of whether your level of risk tolerance can bear the swings between highs and lows of the fund.
  • What's the rate of turnover in the fund? Rapid buying and selling within the fund a) adds to the expenses of the fund, and b) those expenses impact the shareholders’ equity position.

The pages in this section will take a closer look at Mutual Funds according to the following topics:

  1. Who, Why, When.
  2. How to Value.
  3. Tax Issues.
  4. How to Accept.