What is a mutual fund

A mutual fund is an investment company that pools together the money of its shareholders, and invests it in a variety of stocks, bonds or money market instruments. A Mutual fund is usually managed by a professional fund manager, who is responsible for making investment decisions. By owning a share of a mutual fund an investor automatically owns all the shares the mutual fund owns.

Over the years, mutual funds have become very popular amongst the investment public. Billions of dollars have flowed into mutual funds and they continue to expand. Two benefits of investing in mutual funds that make them so popular are, the ability of investors to automatically diversify their investments by buying shares of the fund and the professional management provided by the funds managers. These benefits make investing in mutual funds especially appealing to novice investors.

Potential investors looking to invest in mutual funds will be faced with a wide variety of choices to pick from. There literally exists, a mutual fund to match any type of investment objective out there. From growth to income to bonds and even “green” funds - funds that only invest in environmentally friendly companies, the number of mutual funds available continues to expand every year.

To own a mutual fund, all a potential investor has to do is buy a share of the mutual fund. The price of the share, termed its Net asset value (NAV), is determined by dividing the total market value of the funds investments by the total number of the funds shares outstanding. The Net asset value is calculated daily. Most mutual funds require you to make a minimum initial purchase. Funds can be purchased from a broker or from the mutual fund company itself. In order to cash in on a profit from a rise in share price or dispose of shares, an investor simply sells his mutual fund shares back to the mutual fund.

An expense a potential mutual fund investor might have to deal with is the sales charge, called the load. Some funds require you to pay a load fee when you buy into them while others don’t. Funds that require you to pay the fee are called Load mutual funds, while those that don’t charge a sales fee are called No-load mutual funds. Studies have shown that there is no difference in performance between No-load and load mutual funds. Another expense investors have to be aware of is the management fee charged by fund managers to manage the mutual funds. It is usually a percentage of the total assets under management and varies from fund to fund. These expenses can add up quickly and investors should pay special attention to this.

Mutual funds continue to be a very popular investment vehicle and will probably continue to be so for the foreseeable future.

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Tom anderson is a student of finance and has studied the stock market for over five years.