A mutual fund is a pool of money from several shareholders and is managed by an investment professional. The investment professional invests in securities complying with the stated objective of the fund (i.e. growth, value, income, etc.). A mutual fund is valued daily and reports a price known as a net asset value (NAV) per share. In its simplest form, a NAV is the total value of all the securities held in a fund divided by the total number of shares owned by its shareholders. As the price of the NAV increases or decreases, the shareholder's value will increase or decrease.
Some of the benefits of investing in mutual funds are professional investment management and diversification. As stated above, the securities held in a mutual fund are determined by the investment professional and are based on the objective of the fund. The investment professional has many resources readily available and an extensive knowledge of the financial markets which, when combined with the financial understanding of individual companies and securities, helps to determine the securities to buy and sell. This removes the burden of individual stock and bond investing from an investor and places it with an experienced investment professional.
An investor can seek to select from three general types of mutual funds: stock, bond, or money market. By selecting different types of mutual funds, an investor can diversify risk. Since stocks, bonds, and money markets react differently to market conditions, holding investments in all three types of mutual funds should help to lower the risk of the investor's overall portfolio. In addition, the mutual fund structure (pool of money) diversifies risk for an investor, by providing the investment professional sufficient funds to purchase and sell several different securities. Thus, a shareholder's risk should be lower since gains on some securities can be offset by losses on other securities. Also, an investor's cost to buy a mutual fund is considerably less than having to diversify by buying individual stocks and bonds.
Since an investment professional is hired to manage the mutual fund, the fees for his/her service need to be paid. The investment fees and other expenses related to operating a mutual fund are deducted daily from the total value of the fund prior to the NAV calculation. To review the fees and expenses, an investor should read the mutual fund's prospectus. In addition to the fees and expenses of the mutual fund, the prospectus will also provide additional information such as: investment objective, investment professional managing the fund, historical investment performance, how to purchase and redeem shares, etc. Other information regarding the mutual fund can be obtained through the fund's semi-annual and annual reports, as well as the fund's Statement of Additional Information.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.