What is a Mutual Fund?

So what is a Mutual Fund anyway? There are many ways to answer this question but here are a few definitions from some excellent sources:

“A mutual fund is a form of collective investments that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager who is also known as the portfolio manager, trades the fund’s underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.” Source

“A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities.” Source

“…For them, the financial industry invested mutual funds – pools of stocks or bonds that are managed by professional investors.” Source

“…A mutual fund brings together people, too–people who want to invest. The fund pools together the group’s money and invests it for them in a collection of securities, such as stocks or bonds or a combination of the two.” Source

“A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.” Source

“A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter. Each investor in the fund gets a slice of the total pie.” Source

Hopefully by now you know what a mutual fund is. To put it simply – a mutual fund is a  basket of investment vehicles including stocks, bonds and other securities.

Have a look at the Hodges Fund (symbol: HDPMX). This is a fund that is categorized as a Mid-Cap Blend fund by Morningstar. Their website lists the funds top 25 weekly holdings. So for definition purposes, the stocks listed are considered the investment vehicles, and the stocks are in a mutual fund called the Hodges Fund, symbol: HDPMX.

You can visit Morningstar, MSN Money, Yahoo Finance, and Google Finance to view other mutual funds and their holdings. Just find the ticker symbol, for example HDPMX to look up funds you’re interested in.

Mutual Fund Management

Mutual Funds are managed by one manager who makes the day-to-day decisions.  The fund could also be managed by a team of people. One school of thought is that it’s better when one person is making the buy and sell decisions to better track the fund manager’s performance.  With a team of people making the decisions, an investor might not know who is on the team and who is making the decisions that will affect the fund’s performance.

While it’s important to know what stocks are in a mutual fund, don’t get too caught up in what’s in the fund today because tomorrow there could be stocks that the mutual fund manager bought and sold.

In the mutual fund industry, a fund’s past performance won’t guarantee future success. Just like a great baseball pitcher or batter, your odds of success go up when you are in a fund with a mutual fund manager who has a great track record.

Types of Mutual Funds

Stock Mutual Funds – Also known as “equity funds”, are mutual funds that invest only in stocks. They are considered more risky. However, sometimes with greater risk comes greater reward. Over long periods of time, stocks have outperformed both bonds and cash investments.  Depending on a person’s risk tolerance, owning stock mutual funds would be a good investment for people under the age of 50 who can tolerate a bit of higher risk and have a longer investing time horizon before retirement.

Bond Mutual Funds – Bond funds invest in bonds and other debt securities. These make them more conservative investments that aim to protect your investment money. You typically choose bond funds for income and diversification. Bond funds are considered “low risk”. Again, depending on your risk tolerance, some investment advisers recommend owning 50% bond funds when you turn 50 years old and adjust accordingly as you get older by decade.  In other words, at age 60, you might own 60% bond funds.  This is just one way to invest in bond mutual funds.

I’ll save other types of funds for another article, but the stock and bond funds are two biggies.

My Secret

Let me share with you, that over 25 years ago, I had no idea what a mutual fund was or what a stock was. After searching far and wide on how to invest in stocks, making my own stock selections, etc., I discovered mutual funds, and felt a great relief as I could invest in stocks without having to make the day-to-day buy, sell or hold decisions, and that there were folks out there called mutual fund managers who would do that for me.

If you are new to mutual funds and want more mutual fund analysis, recommendations and information on what to look for in mutual funds, consider bookmarking this site for future mutual fund news.