A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.
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Why Is 'Mutual Fund' the Term of the Day?
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Because they are professionally managed, diversified, and can have a variety of offerings with lower investment minimums than some other options, mutual funds are some of the most popular investment choices among U.S. investors.
For example, let’s say you wanted to invest in a stock like Berkshire Hathaway (BRK.A), the most expensive stock in the country. You may not have (or be willing to part with) $478,005, the price of one share of Warren Buffet’s holding company. However, you could buy into a mutual fund that holds it and other investments. That way, you could get a piece of the action with less risk.
Mutual funds can provide investors with opportunities for foreign and domestic investments that might not otherwise be directly available, and allow investors to choose fund managers with a variety of different investment goals and strategies. It is important to note that like other investments without a guaranteed return, there is a chance that the value of your mutual fund can depreciate. Mutual funds can also come with management and transaction fees, though these fees may vary widely from fund to fund.