A mutual fund is an entity that invests in a variety of different securities, such as stocks and bonds, on behalf of a group of investors. There are currently about 8,200 mutual funds available in the USA.
People who invest in mutual funds become its shareholders. A fund manager will have the responsibility for managing the portfolio of securities on behalf of the shareholders, and buying and selling as necessary to meet the predetermined objectives of the mutual fund. The portfolio is likely to be adjusted frequently in response to changing economic conditions.
There are three main categories of mutual funds: those which mostly invest in shares of company stocks, those which mainly invest in bonds, and those which invest mainly in short-term securities issued by national and local governments.
Profits are made either from the interest or dividends which the securities pay to the fund, or from increases in the value of the securities themselves.
The main advantages of investing in a mutual fund, rather than in individual securities, are diversity, cost-effectiveness, professional expertise and liquidity. Mutual fund portfolios typically contain a wide and diverse range of securities, sometimes thousands.
Mutual fund shareholders therefore spread the risks of their investments across many different sectors and markets, and are less likely to lose money. They also spend much less time and money on their investment activity than they would, if investing in a range of separate securities.
Their investments are managed by experienced professional fund managers, who work full time on maximizing profitability. Finally, their investments are readily accessible, since mutual fund shares can be sold on any business day.
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