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What is a Mutual Fund?
A mutual fund is a pooled investment vehicle that collects money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. It is managed by professional fund managers who make investment decisions on behalf of investors.
Definition
A mutual fund is an investment program funded by shareholders that trades in diversified holdings and is professionally managed.
Key Takeaways
- Provides diversification with a single investment.
- Managed by professional portfolio managers.
- Offers liquidity, affordability, and accessibility to retail investors.
Understanding Mutual Funds
Mutual funds make investing accessible to individuals who may lack the expertise, time, or capital to build diversified portfolios independently. Funds pool investor money and allocate it across various assets according to the fund’s objectives.
Investors buy shares of the mutual fund, and the value of these shares is represented by the Net Asset Value (NAV), which fluctuates based on market performance.
Mutual funds vary widely in investment strategy, risk level, and asset composition. They can focus on equities, bonds, money markets, sectors, countries, or a combination.
Formula (If Applicable)
Net Asset Value (NAV):
NAV = (Total Value of Assets − Total Liabilities) ÷ Number of Outstanding Shares
Real-World Example
A retirement fund may invest in a balanced mutual fund that combines stocks and bonds to achieve long-term growth while managing risk.
Importance in Business or Economics
Mutual funds democratize investing by offering low-cost access to diversified portfolios. They play a significant role in capital markets, retirement planning, and household wealth creation.
Types or Variations
- Equity Funds
- Bond Funds
- Money Market Funds
- Index Funds
- Sector Funds
Related Terms
- Exchange-Traded Fund (ETF)
- Portfolio Management
- Net Asset Value (NAV)
Sources and Further Reading
- U.S. Securities and Exchange Commission (SEC): https://www.sec.gov
- Investopedia – Mutual Fund: https://www.investopedia.com/terms/m/mutualfund.asp
- Morningstar – Fund Research: https://www.morningstar.com
Quick Reference
- Pooled investment vehicle.
- Professionally managed and diversified.
- NAV determines share value.
Frequently Asked Questions (FAQs)
Are mutual funds safe?
They carry market risk, but diversification can reduce volatility.
How do mutual funds earn returns?
Through dividends, interest, and capital gains.
What is the difference between a mutual fund and an ETF?
ETFs trade like stocks, while mutual funds trade once daily at NAV.
