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What Is a Mutual Fund?

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  • Written By: Brendan McGuigan
  • Edited By: Niki Foster
  • Last Modified Date: 17 August 2014
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A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. There are myriad kinds of mutual funds, each with its own goals and methodologies. Whether or not a mutual fund is a good investment is a matter of much public debate, with many claiming they are excellent for the average person, and others saying they are simply a poor way to invest.

A mutual fund may be either an actively managed fund or an indexed mutual fund. Actively managed funds are changed on a regular basis by a fund manager in the attempt to maximize their profitability. The fund manager looks at the market and the sectors a fund invests in and redistributes the fund accordingly. An indexed fund simply takes one of the major indexes and buys according to that index. Indexed funds change much less frequently than actively managed funds, but in theory an active fund has more potential for profit.

Many critics of mutual funds point out that scarcely over 20% of mutual funds outperform the Standard and Poor's 500 Index. This means that nearly 80% of the time, an investor would have been more profitable by simply buying equal shares in all 500 of the companies currently on the S&P 500.

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Supporters point out that for most people the complications involved in traditional investment are simply not worth the effort. A mutual fund offers an easy way to invest in something with a higher return than, say, interest earned at the bank, while keeping funds somewhat fluid. It also eliminates the need to track the market oneself.

There are more types of mutual fund available than there are publicly traded stocks, making the process of choosing one a somewhat daunting prospect for most people. In general, it is good to look at a few types of mutual fund that catch your eye and investigate them to see if they fit your needs. The length of time you want to remain invested, associated costs, tax status, and whether a fund is closed- or open-ended may all prove important.

The sector of investment for a mutual fund may also be something you want to look at. Many sector funds exist, and they are most often the top-performing mutual funds in a given year. The problem, of course, is guessing which sector will next see uniform growth, and avoiding sectors that can be hard-hit by single events, such as transportation.

Many people may also want to consider mutual funds which have specific social agendas, in addition to making a profit. A number of environmentally-friendly mutual funds exist which only invest in companies that meet certain best-practices criteria. Mutual funds based on other social views, political slants, and religious inclinations also exist.

Whichever mutual fund you ultimately wind up using, it is important to stay diversified. Having some money in long-term funds and stocks, with some in money-market funds and bonds, is always a smart way to plan for the future and any bumps that may occur in the market.

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onerichwoman
Post 6

I have four or five years before I retire. Should I invest in mutual funds or money market mutual funds?

Bhutan
Post 4

Moldova-I like to buy growth mutual funds in the small or mid-cap sector. These mutual funds invest in up and coming companies that are positioned for growth in the future.

I have a lot of years before retirement so I prefer more aggressive funds like these. These mutual fund shares can be traded if they underperform.

Moldova
Post 3

Sneakers41-Many discount brokers offer risk screening exercises in order to help determine the level of risk that is best for each individual investor.

The best things to do when shopping for mutual funds online is browse the Morningstar site. It can give you the mutual fund price which is the mutual fund nav, along with the money manager and expense ratio.

Morningstar also rates mutual funds with a star rating. It allows you to see the historic returns of the fund from one, three, five and ten year averages. It really provides a wealth of information.

They also offer information regarding etf mutual funds, which are exchange traded funds. These funds are a little different than traditional mutual funds and are usually bought with a broker.

sneakers41
Post 2

Anon70176- Good for you. Those are some great returns. When becoming a mutual fund investor, the most important thing to remember is the mutual fund risk.

The mutual fund risk is actually measured by a term called beta. A beta of 1.0 indicates average risk. Anything rated higher than 1.0 is considered a volatile fund that is more aggressive.

anon70176
Post 1

I have a hybrid stock and bond fund since 2007. Due to dividends and cap gain distribution, it has gained 15 percent in shares and lost 20 percent of NAV. Should do well long-term. I bought a utility stock in 1979 and re-invested dividends until 1993. It paid $25/mo. then and $175/month now. I am retired, so I like the quarterly dividend checks.

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