What Are Mutual Funds?

what are mutual fundsIf you are asking the question “What are Mutual Funds?” then read on. A mutual fund is a pooled investment vehicle that is professional managed. The holdings of the fund are a multitude of stocks, bonds, cash, commodities, etc. that the fund invests in according to the rules of the fund itself. When you invest in a mutual fund you are telling the fund manager to purchase assets across the portfolio of the funds, increasing its holdings of those assets. The price of the fund is based on the value of the assets being held, which rises and falls as those assets trade in the marketplace.

The size of the fund per share, or Net Asset Value (NAV), is a reflection of the amount of money invested in the fund, how many shares of stock, for example, the mutual fund controls. In the U.S. the definition of a mutual fund is very specific and subject to S.E.C. and I.R.S. regulations. Outside of the U.S. the term is a catch-all for any type of pooled investment vehicle.

The advantages of investing in mutual funds are many offering investors a convenient way to diversify their portfolio along specific goals without having to be an expert in trading or a specific company. They combine that diversification, access to specialized investments and professional management with daily liquidity opportunities. Today there is literally a mutual fund for nearly any investor.

The disadvantages to investing in mutual funds come in the form of costs and opportunity. They can have substantial maintenance fees associated with them. Professional management of your investments does not come without a price. Many mutual funds have rules about redemption including how much and how often. Each fund is different and looking over the prospectus before buying is advised.

Most mutual funds come in one of two flavors, open-end or closed-end funds. An open-end fund is one whose shares are open to be bought or sold to investors by the fund on an ad hoc basis. The NAV is calculated daily and investors can buy or sell shares of the fund as they so choose. Conversely, a closed-end fund is one where the shares of the fund are constant and usually offered up at an IPO. Shares of one of these funds can only be traded among investors and cannot be sold back to the fund itself. As such the price of the trade may occur at a premium to the NAV of the mutual fund, positive or negative.

Finding the right mutual fund to invest in can be a as complicated as buying a particular stock. Assess your goals and risk tolerance and then try to find the right fund that matches those needs.

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Pete Southern

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