What are Mutual Funds?
More than 80 million Americans – or more than half of today’s households – invest in mutual funds. But what, precisely, are mutual funds?
Simply defined, a mutual fund is a company that brings together a large group of people and invests their money in stocks, bonds and other securities. When you give your money to a mutual fund, you – and the other investors – receive shares in return. Each share represents an interest in the fund’s portfolio.
Like a shareholder in a corporation, you will receive a proportional share of the income and interest generated by the portfolio. You can elect to receive these distributions in cash or choose to reinvest these dividends in the fund. Those with a goal to reach often elect to reinvest until the time is right to request that the shares be traded in for cash value.
Mutual Funds FAQs
1: What is a mutual fund?
2: Why do people use mutual funds?
3: Are there any disadvantages to using a mutual fund?
4: Can mutual fund performance be guaranteed?
5: What do mutual funds invest in?
6: Who is the typical fund owner?
1: What is a mutual fund?
A mutual fund, otherwise known as an investment company, is a corporation which pools together investor's money generally to purchase stocks and bonds. Investors participate in the mutual fund by purchasing shares of the entire pool of assets, thus diversifying their investment. The pooled assets are invested by professional managers who buy and sell securities on behalf of the investors.
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2: Why do people use mutual funds?
Many people purchase mutual funds because they can be a convenient and cost effective method of obtaining diversification and professional management. Because mutual funds hold anywhere from a few securities to several thousand, risk is spread out over a number of investments. Additionally, mutual funds generally buy and sell securities in volume, which may allow investors to benefit from lower trading, management and research costs.
Another advantage that mutual funds offer is that fund performance is subject to frequent reviews by various publications and rating agencies, making it possible for investors to conduct direct comparisons between funds.
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3: Are there any disadvantages to using a mutual fund?
Below are some factors that may be disadvantages: (a) all mutual funds charge expenses, whether for marketing, management or brokerage fees. Fund expenses translate into fund charges in a number of ways, all of which are a cost to the investor. (b) Investors exercise no control over what securities the fund buys or sells. (c) The buying and selling of securities within the mutual fund portfolio generates capital gains and losses which are passed back to investors even if they have not sold any of their mutual fund shares.
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4: Can mutual fund performance be guaranteed?
No. As many funds state, past performance is no guarantee of future results, and the fund shares are not backed or guaranteed by the FDIC or other government agency. Note that while some funds buy government backed securities, that is not the same as backing the market value of the fund shares.
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5: What do mutual funds invest in?
Almost anything. There are funds that invest in almost anything an investor could want to invest in including money market funds, stock, and bonds.
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6: Who is the typical fund owner?
According to several surveys by the Investment Company Institute (ICI) conducted over the last several years:
63% of investors own at least two mutual funds.
43% of investors own four or more funds.
The average mutual fund investor holds $18,000 in mutual funds.
The average median age is 44 with a median household income of $60,000.
Other interesting facts from the ICI surveys include:
73% of mutual fund investors own stock funds.
49% of mutual fund investors own bond funds.
52% of mutual fund investors own money market funds.
60% of mutual fund investors purchased their funds through a broker, insurance agent, financial planner or bank rep.