Academic journal article Journal of Accountancy

The World of Mutual Funds: Informed CPAs Can Help Clients Make Better Investment Decisions

Academic journal article Journal of Accountancy

The World of Mutual Funds: Informed CPAs Can Help Clients Make Better Investment Decisions

Article excerpt

For most of the last decade, mutual fund investors have been too busy counting their profits to worry about potential losses. While the average stock gained 11.6% over the last three years, the average mutual fund returned 14.2%. In 1993, some funds that invested in small company stocks or foreign securities climbed 30% or more. Even conservative investments, such as bond funds, have been surprisingly strong performers.

Currently, approximately 40 million people have invested over $2 trillion in more than 5,000 mutual funds. As public interest continues to grow, CPAs often are asked not only whether it's better to invest in mutual funds than in individual stocks or bonds but also what fund types are best. Many CPAs also are interested in mutual funds for their own portfolios. Many others, however, are increasingly called on to help clients make investment decisions. The burgeoning interest in individual mutual fund investing makes it important for CPAs to understand how the funds work to ensure they--and their clients--invest wisely.


A mutual fund pools many investors' monies and buys stocks, bonds and other investments on their behalf. Investors buy shares in the fund; each share represents proportionate ownership of the fund's assets. Mutual funds distribute dividends and capital gains to shareholders in proportion to the number of shares they own. Similarly, fund expenses are charged to shareholders on a per-share basis.

The basic characteristics of mutual funds account for much of their popularity:

Liquidity. With few exceptions, mutual fund shares can be redeemed easily at current market values. Any limits on the ability to redeem shares immediately are identified in a fund's prospectus.

Flexibility. Many mutual funds are part of a "family" of funds developed by a single sponsor. Shareholders in one fund can move their money from one fund to another in the family at little or no cost--often with just a phone call.

Accessibility. Many funds have low minimum initial investment requirements (some as low as $250), and subsequent investments can be even lower (as low as $50). This gives even small investors access to the benefits of mutual fund investing.

Diversification. Small investors generally are unable to acquire on their own investment portfolios as diverse as those of mutual funds.

Asset allocation. Asset allocation is the process of dividing a portfolio among available investment classes--stocks, bonds (domestic and international), cash, real estate, etc. Mutual fund investors can purchase a number of different funds to achieve their targeted allocation or invest in a single asset allocation fund that invests according to established asset allocation goals.

Professional money management. A mutual fund's day-to-day investment decisions are handled by professional money managers. Fund managers base their decisions on intensive ongoing research and up-to-date economic, market and financial information and ultimately are accountable to shareholders for their investment strategies.

Regulation and disclosure. Mutual funds are regulated by the Securities and Exchange Commission, which sees to it that irregularities are avoided or corrected and that appropriate disclosures are made to the public about a fund, its holdings and operations.


Each investor has unique needs and objectives limiting the number of funds he or she might consider. Before helping clients evaluate specific mutual funds, CPAs must help them address three issues:

1. Investment goals (reasons for investing).

2. Time horizon (when the invested funds might be needed).

3. Risk tolerance (how much of the investment can be lost).

Within these constraints, CPAs should consider a number of fund characteristics to help clients find the most appropriate fund or funds. …

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