Investing 101: What is a mutual fund?

June 8, 6:43 PMBusiness and Finance 101 ExaminerAndy Samuels

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A mutual fund is an investment where many smaller investors pool their money together and invest collectively. The funds are managed by a professional who invests the money in stocks, bonds, and/or other securities based on the fund's prospectus. Mutual funds are different from other investments for many reasons:

Regulation

Compared to say, hedge funds, mutual funds are highly regulated. The information about what the funds invest in is publicly available, so the individual investors can make sure that the fund they invested with is investing as planned. Also, funds must keep performance track records which are audited for accuracy. This ensures that investors can trust what the fund says it earns or loses.

Diversification

Instead of having to diversify your investments personally, by investing in a mutual fund, your investment is already being invested in a varied group of securities. This prevents you from having all your eggs in one basket and does so without you having to move all the eggs around yourself.

Professional Money Management

Instead of having to worry about your investments yourself, by investing in a mutual fund you are being guaranteed the knowledge and know-how of professional money managers who's job it is to invest your money wisely.

Scale

Because mutual funds take money from many people and pool it together, they have access to a larger amount of capital to invest, which opens lucrative investment doors that you might not have been able to open by yourself.