A mutual fund is an investment vehicle that pools money from many investors to purchase various assets, such as stocks, bonds and other investments. Mutual funds are professionally managed by an investment team and are an attractive option for investors who do not have the time or experience to manage their portfolios. The diversity of investments held in the fund helps spread risk and can potentially provide better returns than investing in individual assets. Because mutual funds are regulated by the Securities and Exchange Commission (SEC), investors can be assured of their safety and security. Investing in a mutual fund is an excellent way to
people to save for retirement, college or other long-term goals.
Mutual funds are a popular choice among investors as they typically offer the following features:
A mutual fund is a company that collects money from many investors and invests the money in securities such as stocks, bonds and short-term debt. The combined holdings of a mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents a portion of the investor’s ownership in the fund and the income it generates.
Mutual funds are managed by professional money managers. These managers research and select different investments to include in the fund’s portfolio. They also monitor the effectiveness of these investments, making changes when necessary. When an investor buys shares in a mutual fund, he becomes part of the owners of the fund and is entitled to a share of its profits.
Mutual funds offer several advantages for investors. They provide access to a wide variety of investments that can help diversify an investor’s portfolio. Mutual funds are also convenient and relatively cheap compared to other types of investments.
Investors buy mutual fund shares from the fund itself or through a fund broker rather than from other investors. The price investors pay for a mutual fund is the net asset value per share of the fund plus any fees charged at the time of purchase, such as sales loads. Mutual fund shares are “redeemable,” meaning investors can sell shares back to the fund at any time. The Fund should normally send you the payment within seven days. Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information about the mutual fund’s investment objectives, risks, performance and expenses.
As with any business, running a mutual fund involves costs. Funds pass these costs on to investors by charging fees and expenses. Fees and costs vary from fund to fund. A high expense fund must outperform a low expense fund to generate the same return for you.
Even small differences in fees can mean big differences in returns over time. For example, if you invested $10,000 in a fund with a 10% annual return and annual operating expenses of 1.5%, after 20 years you would have approximately $49,725. If you invested in a fund with the same performance and expenses of 0.5%, after 20 years you would receive $60,858. It only takes minutes to use the cost calculator to
mutual funds to calculate how the expenses of different mutual funds add up over time and affect your returns. See the Mutual Fund Glossary for the types of fees.
Every mutual fund is required by law to file a prospectus and regular shareholder reports with the SEC. Before investing, be sure to read the prospectus and required shareholder reports. In addition, mutual fund investment portfolios are managed by separate entities known as “investment advisers” that are registered with the SEC. Always check that the investment adviser is registered before investing.
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