A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or
Mutual funds give small or individual investors access to diversified, professionally managed
portfolios at a low price.
Mutual funds are divided into several kinds of categories, representing the kinds of
securities they invest in, their investment objectives, and the type of returns they seek.
Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions,
which can affect their overall returns.
The overwhelming majority of money in employer-sponsored retirement plans goes into mutual
Investors typically earn a return from a mutual fund in three ways:
- Income is earned from dividends on stocks and interest
on bonds held in the fund's portfolio. A fund pays out nearly all of the income it
receives over the year to fund owners in the form of a distribution. Funds often give
investors a choice either to receive a check for distributions or to reinvest the
earnings and get more shares.
- If the fund sells securities that have increased in
price, the fund has a capital gain. Most funds also pass on these gains to investors in
- If fund holdings increase in price but are not sold by
the fund manager, the fund's shares increase in price. You can then sell your mutual
fund shares for a profit in the market.
Mutual funds are subject to industry regulation that ensures accountability and fairness to
- Minimal investment requirements
- Professional management
- Variety of offerings
- High fees, commissions, and other expenses
- Large cash presence in portfolios
- No FDIC coverage
- Difficulty in comparing funds
- Lack of transparency in holdings