What Is a Mutual Fund?
A mutual fund is a fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities, or money market securities.
What Types of Mutual Funds Are There?
- Equity Fund
- Bond Fund
- Money Market Fund
- Balanced Funds
- Specialty Funds
How Do Mutual Funds Work?
Mutual funds use a pool of investors’ money to purchase a mix of stocks, bonds, other securities, etc. The value of the mutual fund depends on how well the purchased securities are performing. This means when you purchase a share of a mutual fund, you’re investing in the securities’ performance, not their value. Furthermore, a single mutual fund share still constitutes many different investments. Unlike investing in stocks alone, you do not receive voting rights if you buy mutual fund shares. Mutual funds also make money through sale charges, or commissions, and by charging investors a percentage of assets under management (AUM) when they purchase a fund.
Why Invest in Mutual Funds?
There are several potential reasons to invest in mutual funds. First, investing in mutual funds is fairly simple, as there are professional teams who research and manage them. This makes it appealing to beginners or busy professionals. Second, investing in mutual funds allows for diversification, meaning you’ll own shares in numerous different companies, so if one company does poorly, it won’t negatively affect your portfolio as heavily. Finally, mutual funds are liquid, which makes them easy to buy and sell, and they can be redeemed at any time for the current Net Asset Value, plus fees. There are, of course, other benefits to investing in mutual funds, which can be explored here.