What is a Mutual Fund?

A mutual fund is a popular investment that allows investors to combine their money to so that it can be invested in stocks, bonds, and securities. The person who actually does the investing is the portfolio manager, who’s hired by the investors and then manages the investments according to the fund’s prospectus. A mutual fund’s prospectus spells out the fund’s investment objectives, and lets investors know what investment strategy is to be used by the fund manager. It also gives investors information about buying and selling shares of the fund, how much risk is associated with investing in the fund, how the fund has performed in the past, and the fees involved in investing in the fund. Why are mutual funds so popular? For several reasons. They offer a low-cost and low-risk opportunity for an investor to have a diversified portfolio. Without the benefit of pooling resources with others, a single investor would have to purchase a wide variety of individual stocks, bonds and securities in order to have the same type of diversity of investments – exposing the investor to much greater time, expense and risk. Diversification itself means that mutual funds tend to be a more stable and less risky investment. Without a diversified portfolio, investing can be troublesome. The failure of one stock within a diversified portfolio, though, does not mean the loss of your entire investment. Another benefit of mutual funds is that, compared to other types of pooled investment funds, they’re highly regulated by the government, lending additional security. And, they’re managed by professional portfolio managers – saving investors time and giving the added benefit of expert decision-making. Essentially, mutual funds are popular because they can be a simple and efficient way to invest. If you’re considering investing in mutual funds for retirement, to save for your children’s education, or to meet other educational goals, be sure to do your research and get the advice of a trusted financial advisor.