In What Is a Mutual Fund? you learned about the basics of mutual fund investments and some important terms, including the mutual fund expense ratio, the mutual fund sales load, prospectus, and statement of additional information. Now, let's talk about the mutual fund family.
The Definition of a Mutual Fund Family
A mutual fund family is a group of mutual funds that share the same sponsor. Imagine that I created a mutual fund management business and launched three mutual funds:
- Joshua Kennon Stock Fund
- Joshua Kennon Bond Fund
- Joshua Kennon Real Estate Fund
Each of these mutual funds is unique and has its own investment portfolios. At most mutual fund families, each fund is run by separate portfolio managers. But all three would be part of the "Joshua Kennon" mutual fund family.
The Benefits of Investing Within a Mutual Fund Family
There are several benefits for those who want to keep their money invested within a single mutual fund family. These are:
- A consolidated statement from the mutual fund family itself that details your investment in each of the individual funds.
- Many mutual fund companies offer a website through which you can move money between the individual funds that make up a mutual fund family. Going back to our example, if you had $100,000 invested in the Joshua Kennon Stock Fund, you might be able to sell shares of it to buy some of the bond fund and real estate fund at no charge. It's important to read the prospectus to find out how inter-family fund transfers work on a case-by-case basis.
- Some funds will allow shareholders to invest in other mutual funds within the mutual fund family at lower minimum levels.
- Many mutual funds will allow you to have money automatically withdrawn from a checking or savings accounts and split among different mutual funds within a mutual fund family at no additional charge.
- In rare cases, you might be able to invest in a "closed" mutual fund that isn't accepting new shareholders due to an existing investment in a mutual fund family.
The Reasons Fund Companies Create Mutual Fund Families
It may seem somewhat inefficient to create multiple mutual funds but the idea of a mutual fund family is really sound. For example, if all I did all day was sit in a room and value companies, running multiple mutual funds wouldn't take much more effort than running a single mutual fund because my buy and sell decisions could be based upon the type of stock or other security I'm examining. An illustration may help.
Imagine that I run four different mutual funds for a major mutual fund family. These are:
- The Vice Fund (alcohol, tobacco, gambling, and defense stocks)
- Blue Chip Dividend Fund (companies with high dividends and strong balance sheets)
- International Value Fund (companies that are undervalued and located outside of the United States)
- High Quality Intermediate Corporate Bond Fund (bonds of highly rated corporations)
If I'm reading the report of a company like Diageo and it were undervalued at the time, I might be able to put in buy orders for the first three funds - the vice fund, the blue chip dividend fund, and the international value fund. If I'm reading the report of a company like Berkshire Hathaway, it wouldn't qualify for any of the funds because it isn't a vice stock, it doesn't pay a dividend, and it isn't internationally domiciled.
The advantage of this is that it allows the individual shareholder to decide for himself or herself the type of assets that are most appropriate for his or her portfolio. Large mutual fund companies such as Vanguard and Fidelity have dozens of funds in the mutual fund family covering nearly every possible asset class, asset allocation, and investment strategy you can imagine.
