Mutual fund is an investment company that pools funds from many investors and uses the money to buy stocks and other securities. The investors receive shares in the mutual fund. The price of a share in a mutual fund rises or falls depending on the market prices of the securities owned by the fund. The first mutual fund, the Massachusetts Investors Trust, began in Boston in 1924.
People buy shares in mutual funds in part because the funds employ professional investment managers. These experts select stocks or bonds in a mix that they consider suitable for the goals of investors. A mutual fund also enables people to own a large number and wide variety of securities. As a result, a mutual fund shareholder has less risk of loss than an individual who invests in only one security. In many cases, a larger company manages a group of mutual funds, called a fund family. Investors can transfer money among the funds in the family.
A mutual fund does not have a fixed number of shares. Any investor can buy shares from the company at any time, though a minimum purchase amount may be required. Because shares are not limited, mutual funds are sometimes called open-end investment companies. They differ from closed-end investment companies, also called closed-end funds, which have a fixed number of shares that are traded on stock exchanges.
Mutual funds are either load funds or no-load funds. Load funds authorize dealers to sell shares in the fund to investors. The price of a share equals the net asset value per share plus a load. The net asset value is determined by the current market value of the securities in the fund. The load is a sales charge that includes a commission for the dealer. In a no-load fund, the investor buys shares at their net asset value directly from the fund. There is no sales charge. If investors in any mutual fund want to sell their shares, they must sell them back to the fund. The fund must redeem the shares for their current net asset value.
There are several types of mutual funds. Growth funds invest mostly in common stocks of companies that show promise of growing rapidly. Value funds invest in companies that other investors have overlooked or undervalued, in the opinion of the fund’s managers. Balanced funds seek to reduce risk by increasing diversification (distribution of investments). They build a portfolio (collection of securities) that includes bonds as well as stocks. Income funds seek to generate income for investors by acquiring bonds and preferred stocks that offer higher-than-average dividends or interest. Money market funds invest in short-term securities.
Some mutual funds are index funds, which try to match the performance of a targeted group of securities by purchasing a sample of the securities in the group. Stock index funds, for example, may seek to reflect the performance of the stocks of only large companies or of an entire stock market. Such funds require little management and thus charge relatively low fees.
