Getting To Know 'Mutual Funds'

What is a ‘Mutual Fund’?

A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund's investments and attempt to produce capital gains and/or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a wide amount of securities, and performance is usually tracked as the change in the total market cap of the fund, derived by aggregating performance of the underlying investments.

Mutual fund units can be purchased or redeemed as needed at the fund's current net asset value (NAV). A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.


Advantages of Mutual Funds
 

• Diversification: Diversification, or the mixing of investments and assets within a portfolio to reduce risk, is one of the advantages to investing in mutual funds. A truly diversified portfolio has securities with different capitalizations and industries, and bonds with varying maturities and issuers. Buying a mutual fund can achieve diversification cheaper and faster than through buying individual securities on one’s own. 

• Economies of Scale: Mutual funds also provide economies of scale. Buying one spares the investor of the numerous commission charges needed to create a diversified portfolio. The smaller denominations of mutual funds allow investors to take advantage of cost averaging.

• Easy Access: Mutual Funds can be bought and sold with relative ease, making them highly liquid investments.

• Professional Management: Mutual funds are run by managers, who spend their days researching securities and devising investment strategies. So these funds provide a low-cost way for individual investors to experience (and benefit from) professional money management.

• Individual-Oriented: All these factors make mutual funds an attractive options for individual investors who don't want to (and don’t have the expertise or inclination to) actively manage their money. They offer high liquidity, they are relatively easy to understand, provide good diversification even if you do not have a lot of money to spread around, and carry the potential for good growth of the capital invested.