Mutual Fund

Definition

The term mutual fund is used to describe a financial vehicle that allows investors to pool their money together to achieve a predetermined investment objective. Typically, a mutual fund will have a fund manager, who is responsible for aligning the holdings of the fund with the stated investment objective.

Explanation

Mutual funds allow smaller investors to buy into a larger pool of securities.  The lower transaction costs (fees) associated with mutual funds allows the investor to enjoy the benefits of a diverse portfolio of stocks and bonds versus the cost of assembling the portfolio from scratch.

Mutual funds offer the investor a wide array of investment objectives.  While there are endless combinations, these choices would include:

Growth (capital gains), value (income) and blends of the two; large, mid-sized and small companies in terms of market capitalization; domestic versus international (foreign) stocks; municipal, government, high yield and long-term bonds; commodities; real estate; technology; utilities; industrial; cyclical versus defensive; indexed versus actively managed funds.

Mutual funds also provide the investor with the advantages of diversification, thereby eliminating the risk associated with an individual stock or bond holding.

Related Terms

balanced fund, market capitalization, front-end load, back-end load