Ethics in Investing
Mutual funds refer to the investments that you collect with other investors to buy either stock, bonds, or other securities that would have been hard to purchase solely. This collective amount of money is known as a portfolio. The value of the mutual fund, that is, the Net Asset Value, that is, the ratio of the sum amount of securities in the portfolio to the number of shares that gave rise to the funds. The Net Asset Value, therefore, changes depending on the value of the securities. The investors in the mutual fund have no control over the value of the securities in the mutual fund, they only own the shares in the fund.
Mutual fund timing refers to the short term gain of profits through the selling of funds invested in the mutual fund. It is not illegal but it is frowned upon by many investment companies because of the additional costs it comes with (Chang & Lewellen, 2014). The profit gotten from mutual fund timing is gotten by lessing net asset value from the closing market price of the stock or security. The capital fund in the mutual funds is controlled by the fund manager who secures the fund, or rather, sells it to secure redemptions in the form of money to the shareholders. Selling the funds within a short time adds on the costs of transactions which increase the cost of operating the fund. To prevent this most shareholders sign an agreement that offers penalties to members who opt for mutual fund timing. In the event that any of them breaches this contract, then they are accused of late trading.
Late trading is an illegal act that involves the redemption of mutual funds immediately after the Net Asset Value is determined. The NAT calculations predict what the shareholders would earn if the funds keep on improving in the market. Trading of the funds immediately consequently affects long term investors would have benefitted from the growth of the mutual funds.
Personal trading is the act of a fund manager trading for themselves and at the same time also trading for the investors. The Securities and Exchange Commission prohibits this type of activity and requires that the fund purchases reveal information about their sales to unmask personal trading and also protect investors from abusers.
According to Duan and Jiao (2014), mutual funds make up close to a third and a quarter of the companies within the country. It thus has a great potential in shaping the corporate governance of the country. The shareholders of mutual funds in a company have the freedom to disagree with any decisions made by the country. They can even go as far as pulling out of the company. Another power that the mutual funds have is intervening in the management of the firm, and in other cases vote against the management of the people in place.
Unlike hard dollars that involve the payment of hard cash, soft dollars pay the brokerage companies through commission received from the revenue. Soft dollars are usually higher than the hard dollars because they also pay on the services that would have been provided along the way. However, they are usually criticized because they are not recognized in the purchase of funds making them obscure and untrustworthy.
Socially Responsible Investments are carried out by companies that are responsible socially (Statman, 2012). These funds can be created in socially valuable people, through a social mutual fund, or via an exchange-traded fund. An example is when companies that sell addictive products seek out other companies that solve other social problems in society so that they can be able to make their purchases.
References
Duan, Y., & Jiao, Y. (2014). The role of mutual funds in corporate governance: Evidence from mutual funds’ proxy voting and trading behavior. Journal of Financial and Quantitative Analysis (JFQA), Forthcoming.
Statman, M. (2012). Socially responsible mutual funds (corrected). Financial Analysts Journal, 56(3), 30-39.
Chang, E. C., & Lewellen, W. G. (2014). Market timing and mutual fund investment performance. Journal of Business, 57-72.