What is a Mutual Fund?

A mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital, and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.

There are three varieties of mutual funds classified by federal law. An open-ended fund is one that buys and sells their shares to investors every business day. These shares are priced at net asset value after the close of financial markets. A closed-end fund is one that issues shares once, in an initial public offering. After, the shares are traded on a stock exchange. A money market fund invests in very short-term securities. An investment with a money market fund is not insured or guaranteed by the FDIC or any government agency.

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