Shopping for Investments? How to Distinguish Between Mutual and Commingled Funds

Have you ever lingered in a grocery aisle trying to decide on which kind of salad dressing to purchase? There are so many options — from ranch to raspberry vinaigrette to bleu cheese and fat free to extra creamy — the array of products seems endless.

At times, investing can feel like shopping. You may know your goals, but making decisions can seem overwhelming because it's challenging to distinguish between your choices.

Your employer-sponsored savings plan might offer several types of investment vehicles. Perhaps your plan offers two distinct types of funds — mutual funds and commingled (or institutional) funds. What are some of characteristics these two types of investment vehicles share — and how do they differ?

The Similarities...
To the untrained eye, commingled and mutual funds appear virtually identical. Here are some of the similarities between them.

Structure
Both are pooled investment vehicles that pursue specific financial goals by investing in various types of securities. Technical aspects, such as fund managers, performance reporting, and fund investments, may also be similar.
Underlying Investments
Depending on their objectives, both types of funds may invest in common stocks, bonds, money market securities, or a combination of various asset classes.
Management
Professional money managers — who have access to extensive research and market information — decide on which types of securities to buy and sell.
Diversification
Diversification can be built into both commingled funds and mutual funds. A portfolio could consist of securities from hundreds of different stocks or bonds. By pooling money, shareholders are able to spread their assets among many different securities, which may reduce the risk of loss due to any one company or institution.

And the differences...

Availability
Generally, institutional or commingled funds are sold only to employer-sponsored retirement plans and are not available to the general investing public. Mutual funds are available to everyone. You can find share prices and fund performance information for mutual funds in the newspaper, while information about commingled funds is not listed publicly.
Legal Registration

Mutual funds are sold to investors in the general public and also through some retirement plans. They are governed by the U.S. Securities and Exchange Commission (SEC) under the Investment Company Act of 1940, the Internal Revenue Code, and state securities and tax laws. Generally, mutual funds must be registered with the SEC and sold only by prospectus, a legal document designed to uniformly disclose costs, risks, and other key information.

Commingled funds on the other hand, could be overseen by a variety of regulatory bodies, depending on their make up and the make up of the particular savings plan that incorporates them as investment choices. Applicable regulations include, but are not limited to, the U.S. Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA), and federal and state banking regulations and tax laws.
Fees
Fees for commingled or institutional funds can be lower than mutual fund fees, and can differ between clients. However, mutual funds must charge uniform fees to all customers. Their fees may be higher because of advertising and other expenses. Mutual funds may also include charges for administrative activities in addition to investment management fees.

Conclusion
Understanding the similarities and differences between mutual and commingled funds may help you to distinguish between your investment choices.

For more information about each of the funds in your employer-sponsored retirement plan, visit the Investment Options section.

Copyright© Russell Investments 1998 - 2009. All rights reserved.

This is a publication of Russell Investments. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Frank Russell Company. It is delivered on an "as is" basis without warranty.

Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.

The opinions expressed in this material are not necessarily those held by Frank Russell Company, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market.

Date of first use: February 2005
USI RC: 495

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