Mutual funds are a kind of shared investment. When you buy shares in a fund, you become the owner of a group of securities or other assets in a pool with other investors. A mutual fund manager manages the fund, selecting the specific assets that will populate the fund, and charges investors a fee to participate.
Mutual funds serve as a way to make a diversified investment. Although a mutual fund typically focuses on a specific asset type, such as bonds or stocks, it allows for diversification within that asset type. For instance, a stock fund could contain dozens of different stocks. This allows investors to invest their money in a number of different assets at once, making multiple investments with one purchase. Diversification is designed to use the gains of some assets to protect against losses in other ones.
Mutual funds vary in the types of assets that they hold. This allows individual investors to purchase shares in funds that meet their particular needs and preferences. Mutual funds exist for securities such as stocks and bonds, including some funds that contain both stocks and bonds together, and they also are available for money-market instruments, such as certificates of deposit and treasury bills. Some mutual funds include cash, according to the Securities and Exchange Commission.
A mutual fund serves to provide investors with professional management of their investment. For an amateur investor, it is a tall task to manage a portfolio, especially to maintain a diversified assortment of securities. The fund manager tackles that job with a mutual fund for all of the fund's shareholders. In addition, a mutual fund simplifies the trading process for investors. Instead of having to navigate the buying and selling of stocks, including the financial details and the documentation, the mutual fund company manages all trades for its shareholders.
Mutual funds exist to meet a wide range of investor goals. Some mutual funds target steady, long-term growth, while others focus on more short-term goals. For instance, an investor seeking a conservative, low-risk investment with long-term returns could invest in an index fund, which is a mutual fund designed to grow at the same rate as a selected stock index, such as the S&P 500. Other more ambitious stock funds seek to produce returns better than the market averages. Meanwhile, bond funds target income as a primary goal over growth, because the bonds in the fund produce a steady stream of interest payments to investors.
- Securities and Exchange Commission: Mutual Funds
- "Making the Most of Your Money"; Jane Bryant Quinn
- SmartMoney.com: America's Best Mutual Fund Managers
- American Funds: Types of Mutual Funds