What is a Mutual Fund?

Key Takeaways

• A mutual fund is a collective investment that pools money from many investors.

• A mutual fund is a smart and easy way to diversify your investment.

• Mutual funds provide individual investors access to professionally managed portfolios.

Understanding mutual funds

A mutual fund is a common investment vehicle as well as an asset. A mutual fund pools money from you and other investors and invests in various types of assets, such as stocks, bonds, market money instruments, etc.

Buying a share in a mutual fund can get the same mix of investments, instead of holding a single stock. For individual investors, it provides an easy and cost-effective way to diversify your investments. It's a smart way of putting eggs in multiple baskets.

Mutual funds usually are actively managed by professional fund managers, acting in the best interests of investors. For someone with limited time to invest, a mutual fund gives access to professionally managed portfolios.

The investment strategies, objectives, managers, risks, fees, and expenses of mutual funds, will all be disclosed in the prospectus of each fund.

Example

Suppose you believe Amazon will have great potential during the post-pandemic period as consumers are accelerating their shift to online shopping. You want to buy some Amazon shares to enjoy the benefits of its future growth.

You get only $2,000 for investment, but Amazon's stock closed at $3,469.15 per share on September 10, 2021. In this case, a mutual fund with exposure to Amazon would be an alternative.