Thrift institutions, trust companies, and banks that are federally or state chartered manage common trust funds. Common trust funds represent the pooled assets of many small trusts, and individual beneficiaries receive returns proportionate to their share of the principal. Conversely, money managers manage mutual funds, which combine the funds of many investors. Money managers invest the pooled funds in various types of securities. The objective of both types of funds is to create wealth in the form of capital gains and income. Mutual funds must offer potential investors a prospectus that outlines the goals and objectives of the fund, details fees, and shows the fund's performance record.
Common trust funds are subject to state regulation, unless they are federally chartered. An "N.A." designation in the legal name of a common trust fund stands for "national association," and indicates that the fund is federally chartered. Federally chartered common trust funds are subject to dual regulation, receiving oversight by the state’s regulatory body and the Office of the Comptroller of Currency. In contrast, the Securities and Exchange Commission regulates mutual funds, but this does not exclude these funds from state regulation. Federal law regulates all mutual funds, but not all common trust funds are federally regulated.
In most instances, common trust funds are tax-exempt under Revenue Ruling 81-100. Mutual funds are sometimes tax-deferred, when attached to an IRA, but not exempt. Typically, fees for common trust funds are lower than those of mutual funds. Common trust funds and mutual funds offer participants automatic diversification, and both report to respective investors on a quarterly basis. Federal law guarantees the level of reporting detail for mutual fund participants, while common trust fund quarterlies may or may not achieve a similar level of detail.
Collective investment funds are trusts created and administered by banks and thrifts. These funds are typically divided into two types: A1 and A2 funds. A1 funds are composed of fiduciary accounts the bank holds, and the industry commonly refer to these funds as "common trust funds." A2 funds consist of commingled funds exclusively for tax-qualified retirement plans. Although both types are collective investment funds, the industry often uses the term "collective investment fund" when referring to A2 funds, according to the U.S. Treasury Department.
Mutual funds are available to anyone. You can invest through a company-sponsored 401(k) plan, through a personal IRA or Roth IRA, and through a standard brokerage account. You can even buy through an online brokerage, and you can buy full shares or fractional shares. The value of the fund is calculated once daily, and you can buy and sell shares at the end of the day only. Since they are collective investment funds, common trust funds cannot be sold directly to retail investors, as the SEC does not regulate these funds. Rather, they are sold to institutional investors through defined benefit and defined contribution plans.