Mutual Fund

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities.

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 funds.

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 a distribution.
  • 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.
Transparency

Mutual funds are subject to industry regulation that ensures accountability and fairness to investors.

Pros:

  • Liquidity
  • Diversification
  • Minimal investment requirements
  • Professional management
  • Variety of offerings

Cons:

  • High fees, commissions, and other expenses
  • Large cash presence in portfolios
  • No FDIC coverage
  • Difficulty in comparing funds
  • Lack of transparency in holdings