Mutual Funds

Investing in Mutual Funds

A mutual fund is an investment company that pools money from shareholders and invests those funds in a professionally managed, diversified portfolio of securities in accordance with pre-defined goals. Some advantages of investing in mutual funds include:

  • Professional management - the research, selection, and monitoring of the portfolio is managed by trained fund managers to meet a specified goal, such as growth or income; making investing in mutual funds particularly attractive for busy individuals who don't want to micromanage their investments
  • Diversification- fund managers typically invest in a variety of securities, seeking portfolio diversification, which helps reduce risk by offsetting losses from some securities with gains of others
  • Convenience- you can often get started with a smaller amount of money than you'd think, and once established, you can automate several functions related to investing in mutual funds

Types of Mutual Funds

  • Open-End Mutual Funds- these mutual funds are not traded on exchanges and are considered to be a continuous new offering of securities because when an investor buys shares, the fund company issues new shares
  • Closed-End Mutual Funds- these mutual funds have a fixed number of shares and are traded on public exchanges
  • Investment Objective Mutual Funds- these mutual funds are classified by their investment objective, which may be growth, income, "balance" (income and long-term capital gain), or other objective

The Prospectus

Any new issue of an open-end mutual fund must be sold by prospectus. The "Prospectus" is a document that identifies essential information pertaining to the fees and expenses, objectives, risks, history, and other pertinent information about the fund. The Prospectus must be delivered to the investor for review to ensure they have the opportunity to make a fully informed decision about the potential investment in the mutual fund.