Mutual Fund
What Is a Mutual Fund?
A mutual fund is an investment vehicle that pools money from many investors to purchase a diversified portfolio of securities such as stocks, bonds, or other assets. The fund is professionally managed by a portfolio manager or investment firm.
Each investor owns shares of the mutual fund, representing a portion of the underlying investments.
Why It Matters
Mutual funds allow investors to gain diversified exposure to financial markets without needing to select individual securities. They are commonly used in retirement accounts, brokerage accounts, and employer-sponsored plans.
Because mutual funds spread investments across many assets, they can help reduce the impact of risk associated with individual securities.
How a Mutual Fund Works
When investors buy shares in a mutual fund, their money is combined with funds from other investors.
The fund manager uses this pooled capital to invest in a diversified portfolio based on the fund’s strategy.
The value of each share is determined by the net asset value (NAV), which is calculated daily based on the value of the fund’s holdings.
Investors earn returns through:
- capital gains
- dividend distributions
- interest income
Example
An investor purchases shares in a mutual fund that holds hundreds of stocks across multiple industries, providing diversified exposure to the market.
Mutual Fund vs Exchange Traded Fund (ETF)
- A mutual fund is typically bought or sold at the end of the trading day at its NAV.
- An ETF trades throughout the day on a stock exchange like a stock.
FAQs About Mutual Funds
Are mutual funds professionally managed?
Yes. Most mutual funds are actively managed by portfolio managers.
Can mutual funds help diversify a portfolio?
Yes. They typically hold multiple securities across sectors or asset classes.
Do mutual funds charge fees?
Yes. Investors may pay management fees or expense ratios.
Related Terms
