What is a Mutual Fund?
Many of you have probably heard the investment term “mutual fund” or even have investments in them.
But what is a mutual fund?
This article will define it for you.
Mutual funds are a mixture of stocks, bonds, and other securities that allow you to pool your money with other investors to create a strategy that may be difficult to get on your own. This portfolio holds a price known as a net asset value (NAV) and is determined by the total value of securities in the portfolio divided by the number of fund’s outstanding (not purchased) shares.
An investor of a mutual fund does not own any securities, but rather shares in the fund itself. This means that an investor typically doesn’t need a lot of money to buy a share of the portfolio. Mutual funds could contain upwards of 100 securities, which means investing in one automatically helps you diversify your investments. An investor could make one purchase and get a variety of securities.
Mutual funds are built and managed by licensed professionals. If you do not have a license to buy securities, you are not able to build a mutual fund. Firms may have multiple mutual funds for their clients to pick from that best fits their needs. These different portfolios may be based on risk. Higher risk funds may be offered to clients with a higher risk tolerance and/or longer period before retirement and vice versa for low risk funds. Other ways mutual funds may be built is by industry, country, or some similar criteria. This gives investors the ability to choose diversified portfolios related to their own needs or wants.