What is mutual fund?
Definition
A mutual fund pools money from multiple investors to invest in securities. Professional money managers allocate the assets to generate capital gains or income. The fund's portfolio matches the stated investment objectives. This provides small investors with access to professionally managed portfolios of securities, and shareholders participate proportionally in gains and losses. Mutual funds invest in many securities and are evaluated based on the aggregate performance of the underlying investments.
Understanding Mutual Funds
Mutual funds use money from investors to buy stocks and bonds. Its value depends on the performance of these securities. By buying a share of a mutual fund, you are investing in its portfolio's value. However, mutual fund shares do not offer voting rights like stock shares. A mutual fund share represents investments in multiple securities, giving it a net asset value (NAV) per share. The NAV is calculated by dividing the total value of the securities in the portfolio by all outstanding shares. These shares can be bought or sold based on the fund's current NAV, which remains constant throughout the day and is settled at the end of trading hours. The mutual fund's price changes with the NAVPS settlement, benefiting shareholders with diversified portfolios. Unlike those who invest solely in one stock, mutual fund investors spread their risk across many securities, avoiding potential loss. Google's poor performance has less impact on the fund's overall portfolio due to its small size.
How Mutual Funds Work
A mutual fund is both an investment and a company, similar to the dual nature of AAPL shares representing Apple Inc. Buying a share of Apple gives partial ownership of the company, while a mutual fund investment gives partial ownership of the mutual fund company and its assets, which focuses on making investments. Investors earn from a mutual fund in three ways: income from dividends and interest, distributed to owners; reinvested earnings, giving more shares; and... (text incomplete) Fund gains from selling securities are passed to investors. If holdings increase in value, the fund's shares rise, allowing for profitable selling.
A mutual fund's CEO is the fund manager, hired by the board and legally obligated to work in shareholders' best interest. They typically own the fund and employ analysts for investment research. A fund accountant calculates the fund's NAV, determining share price changes. Mutual funds require compliance officers and attorneys to meet government regulations. Most mutual funds belong to large investment companies, like Fidelity Investments or The Vanguard Group.
Gist
A mutual fund is an investment vehicle made up of a portfolio of stocks, bonds, or other securities.
Mutual funds provide small or individual investors with low-cost access to a diversified, professionally managed portfolio.
Mutual funds are divided into several categories, representing the types of securities they invest in, their investment goals, and the type of return they seek.
Mutual funds charge an annual fee (called the expense ratio) and, in some cases, commissions, which can affect their overall returns.
Most of the money from employer-sponsored retirement plans goes into mutual funds.