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.
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.