What Is A Mutual Fund?

What is a mutual fund? A mutual fund is a company that pools the money of many investors -- its shareholders -- to invest in a variety of different securities. "A mutual fund is a company that pools the...

"A mutual fund is a company that pools the money of many investors -- its shareholders -- to invest in a variety of different securities," from Michelle Smith and the website of the Mutual Fund Education Alliance. The group chooses a mix of stocks and bonds with a certain goal in mind. A simple definition of a stock is a piece of a company that has public offerings. Bonds are loans that you make to a company or a government in return for interest on your principle amount. Almost 50% of American households now invest in mutual funds because of their versatility and the fact they are managed by experts in the field, who have the knowledge and time that you do not.

The stocks, bonds and other investment types chosen for the mutual fund all relate to a common goal. For example, there are mutual funds that consist entirely of securities from companies that use or develop alternative forms of energy. Many mutual funds use this type of advertising to gather interest and investment. Another great thing about mutual funds is that you can gain access to investments with very little money. This means that a family or small investor can gain access to the market by pooling their money with others in similar situations.

As you age and your needs change, your mutual funds grow and change with you. Some mutual funds have the goal of generating income without losing your principle investments. These types are good for people nearing or in retirement. Younger people may want mutual funds that find young companies with a potential for rapid and large growth and are willing to accept the risks. Open-ended mutual funds have managers who are constantly ready to redeem or sell shares to keep the portfolio moving in the positive direction in accordance with its charter.

Some of the more common objectives that you may run across are maximum capital growth, current income and capital growth, current income and maximum safety of principle and tax-exempt income. The securities are chosen to try and meet these objectives. They may be U.S. government money markets, municipal bonds or even international securities.

Keeping in mind that the higher the potential for capital appreciation, the higher the potential risk. The funds that are targeting maximum growth and appreciation do not really return current income. Older investors looking for income should move toward low risk securities that focus on the safety of the capital using bonds and notes.

Like with most things, do some research into the particular mutual funds that interest you. One term that you should pay attention to is the 'total return'. The total return is a measure of the performance of the mutual fund. It may be shown in different ways such as year-to-date or annualized over the life of the fund. Also, check the turnover for the mutual fund. This measure of trading activity can show how the fund's manager choices are performing. A high rate of turnover may cause higher transactions costs.

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