What is a Mutual Fund?
Mutual funds were first created in the 1920s, and today, millions of Americans depend on these investments to build retirement savings. To better manage your assets, it's essential to understand the basics of how mutual funds operate.
The Basics of Mutual Funds
Mutual funds are investments that pool the money of many investors to buy securities, such as stocks, bonds, cash investments, or some combination of the three.
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Mutual funds are managed by professionals, who oversee the funds on behalf of shareholders. By their very nature, mutual funds offer diversification that may help reduce risk while increasing the overall return potential of the investment. If one security held by a mutual fund loses value, another security may rise in value, offsetting the loss.
Types of Mutual Funds
- Stock funds invest in public companies that sell shares on the stock market. In this category there are several types, including growth funds that invest in companies whose earnings are expected to increase faster than the overall market. In contrast, value funds typically focus on stocks that the portfolio manager believes are selling for less than they are worth. Funds are also divided into small cap, mid cap and large cap, depending on a company’s market capitalization, which is its share price times the number of shares outstanding. Small-cap stocks normally carry more market risk than large-cap issues.
- Fixed-income funds invest in bonds issued by government agencies and corporations. Unlike direct bond investments, these funds do not mature, so your principal will not be repaid unless you sell your future holdings. They also do not offer guaranteed interest payments. Fixed-income funds may lose value if interest rates rise, but in general they are less risky than many types of stock funds1.