Home  >  Financial Articles and Q&A  >  What is a mutual fund?

What is a mutual fund?

Jan 10, 2012 by Ryan from Chicago, IL in  |  Flag
4 Answers  |  5 Followers
Follow Question
14 votes
Carolyn Taylor Level 15

A mutual fund is an investment vehicle comprised of pooled funds from multiple investors, collected for the purpose of investing in stocks, bonds, and other securities. The funds are professionally managed by the fund manager according to a defined investment objective. Mutual funds allow investors to build a diversified portfolio with minimal initial investment and high quality professional management. They provide diversification to investors in a cost effective manner as investors do not need to individually purchase the securities, but rather, obtain exposure to the collection of securities held in the fund. Mutual funds allow the average investor to participate in opportunities previously only available to large investors.

Besides the advantage of portfolio diversification, which decreases investment risk, mutual funds have several other attractive features. They offer daily liquidity, regardless of whether the individual securities can be bought and sold daily. A mutual fund eliminates the need for the individual to manage their investments on their own, as this becomes the fund manager’s responsibility. Expert management can be an attractive and convenient option for many investors, although it does eliminate much of the individual investor’s control. Mutual funds are also subject to an annual fee, which represents the cost of the manager’s expertise, as well as the transaction fees of buying and selling securities. These fees should be closely examined before a purchase decision is made.

There are three basic types of mutual funds: equity funds, fixed-income funds, and money market funds, however the fund objective can vary greatly with complex investment strategies. Hybrid, balanced, or lifestyle funds can be a combination of asset classes or sectors, comprised of a fixed or variable asset allocation maintained by the fund manager.

The Investment Company Act of 1940 created more stringent regulation of fund companies and greater disclosure requirements. A prospectus is required to be delivered to all investors, providing detailed information regarding the objective, strategy, asset allocation, fees, and much more. Mutual funds can be either actively or passively managed. A passively managed fund, or an index fund, mirrors the return of a market index, while an actively managed fund attempts to outperform based on the manager’s skills. Exchange traded funds, an index product; now provide a competitive alternative for mutual fund investors. Mutual funds can be a beneficial tool for investors, be sure to examine the details of the fund and other investment options before making a purchase decision.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above

Comment   |  Flag   |  Jul 12, 2012

1|600 characters needed characters left
8 votes

Hi Ryan, It's important to remember that a mutual fund is an investment company. You are buying shares of the investment company, not of their stock holdings. They receive and `pool' the money of their shareholders and invest in the markets. So, in essence, you're buying shares of a company that invests in the stock market.... a distinction many individual investors don't realize.

Comment   |  Flag   |  May 23, 2012 from Moorpark, CA

1|600 characters needed characters left
8 votes
Jesse Level 18

The mutual fund is a lingering relic of the 20th century quickly being replaced/made obsolete by the ETF (Exchange-Traded Fund). See http://en.wikipedia.org/wiki/Exchange-traded_fund

Comment   |  Flag   |  Jul 12, 2012 from Bend, OR

1|600 characters needed characters left
4 votes

An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Comment   |  Flag   |  Jan 10, 2012 from Boston, MA

1|600 characters needed characters left