What is a Mutual fund? | FBS Glossary

What is Mutual Fund?

A mutual fund is a professionally-managed investment scheme consisting of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.

A mutual fund is a financial structure that works like a piggy bank for an unlimited number of people, except for a bank’s management – only one company decides the money’s fate. Mutual funds are one of the most favorite instruments for an investor due to their convenience and low risks.

Types of Mutual Funds

There are many different mutual funds, with substantial or almost no difference between them. The type of fund depends on the asset the fund is investing in. For example, there is a fund for tech stocks, broad stock market, bonds of different countries, stocks with high volatility, biotech stocks, real estate investment trusts (REITs), etc.

Also, funds are divided by type of payment. For example, some funds invest all income back into chosen shares, increasing the price of Mutual Fund’s shares. Others pay dividends from stocks and bonds to their investors. Also, you can just sell fund’s shares and take your money from the market.

Finally, there are a closed-end and an open-end mutual funds. A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering. Open-end funds are offered through a fund company that sells shares directly to investors.

Advantages of Mutual Funds

Decisions are already made for you. Every mutual fund has a prospectus that has everything: from fund’s strategy and an expected annual return to payout and rebalancing terms. So you don’t need to analyze the market every day; a fund has already done it for you.

Mutual funds are well-diversified and balanced. Even though most mutual funds focus on specific markets (bonds, stocks, etc.), they invest in hundreds of different instruments. Thus, if you buy shares of various funds, you will get a steady and safe portfolio.

Disadvantages of Mutual Funds

Any sane person knows that free cheese happens only in a mousetrap. You need to pay for managing your funds, and mutual funds are usually expensive. Almost all funds take a percentage of their income, generally around 1%. It may seem small, but year-by-year there will be lots of uncollected profit. That’s why you need to choose mutual funds carefully, looking for the cheapest and the most reliable one.

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2022-07-27 • Updated

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