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What is a mutual fund?


Mutual funds is professionally managed company that collects money from many investors to purchase different types of securities such as stocks and bonds. Those combined holdings make fund's portfolio.Shareholders buy shares, parts of portfolio's value and participate proportionally in fund's gains and losses. Money managers allocate assets and try to produce gains for investors. Portfolios are managed differently in accordance with investment goals formulated in prospectus. Because funds invest in huge number of securities, its price of share is called net asset value (NAV) which is calculated by dividing total value of securities on the fund by total amount of shares outstanding. Price is settled at the end of the trading day so it doesn't fluctuate during market hours like regular stock. There is more types of mutual funds that are classified according to the kind of securities that they invest in, investment goals and type of return they seek.

Equity funds invest in stock but not all funds are the same. They can be divided into funds that invest in small, mid and large cap companies or in stock that pay regular dividends or that track particular index. They can be also classified based on their investment approach or whether they invest in domestic or foreign stock. Bond funds typically aim to produce higher returns as they invest in bonds because they pay interest but because there are different types of bonds reward in bond funds vary. Index funds invest in securities that correspond with major market indexes. Balanced funds combined different types of securities. Basically there is fund for nearly every investing approach.

Mutual funds are companies that professionally manage funds and as every companies they have expenses. This is the reason why funds charge investors with fees and expenses. (load of fund)Annual fund operating fees also known as expense ratio measures how much of funds's assets is used for administrative and operational expenses. Shareholders fees are paid directly by investors when buying or selling the fund. If investor wants to withdraw earlier from the fund he or she will be charged with some sort of penalty fee. Investors should be really careful when choosing the right mutual fund because even the slightest difference in fees can have large difference in return. Mutual funds also offer different classes of shares that have different expenses in terms of fees.

There is a reason why mutual funds are so popular with investors. It offers diversification of portfolio at a low price. this means that by buying shares if fund you invest in hundreds and even thousands of different shares, mitigating the risk and lowering the costs because you don't have to pay the commission that you would pay if you try to build portfolio by yourself. Because they trade on major exchanges that makes them easy to access and highly liquid.They can also be the only way for average investors to buy certain kind of shares. Money managers almost always work for high-net-worth individuals so mutual fund is perfect opportunity to enjoy benefits of professionally managed fund. As we mentioned early there are many mutual funds so investor can find one that match his or her investment style and goals.

Even though they have significant benefits, mutual funds aren't perfect. Like with any other investment there is no guarantee of success, it carries certain amount of risk. Professional management of fund's assets is great but it comes at a cost, regardless of funds performance. Researching and comparing funds is not an easy task because every funds differ and they don't provide metrics for comparison like regular stock do.
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