Equities Trading and Investment

What Is a Mutual Fund?

What Is a Mutual Fund?

Mutual funds are pooled investments managed by professional money managers. They trade on exchanges and provide investors with access to a wide mix of assets selected for the fund. A professional fund manager handles this mix of investments, and the fund's assets and goals are detailed in the prospectus.

For those who deposit into their mutual funds from their paychecks, they offer automatic investing and lower investment risk than buying stocks on your own because most funds have diverse holdings.

KEY TAKEAWAYS

  • A mutual fund is a portfolio of stocks, bonds, or other securities purchased with the pooled capital of investors.
  • Mutual funds give individual investors access to diversified, professionally managed portfolios.
  • Mutual funds are known by the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
  • Mutual funds charge annual fees, expense ratios, or commissions, which lower their overall returns.
  • Many American workers put their retirement funds into mutual funds through employer-sponsored retirement plans, a form of "automatic investing" that builds wealth over the long-term with more limited investment risk than other asset choices.

Understanding Value Investing

These funds hold much of the retirement funds of middle-income Americans, but this wasn't always the case. In 1980, under 6% of U.S. households had money in mutual funds.

By 2023, about 52% of American households were invested in them, and these households held shares for a vast majority, 88%, of all mutual fund assets.

When setting aside their money in mutual funds, these households can access a broad range of investments, which can help cut their risk compared to investing in a single stock or bond. Investors earn returns based on the fund's performance minus any fees or expenses charged. Mutual funds are often the investment of choice for middle America, providing a broad swath of middle-income workers with professionally managed portfolios of equities, bonds, and other asset classes.

How Are Earnings Calculated for Mutual Funds?

  1. Dividend/interest income: Mutual funds distribute the dividends on stocks and interest on bonds held in its portfolio. Funds often give investors the choice of either receiving a check for distributions or reinvesting earnings for additional shares in the mutual fund.
  2. Portfolio distributions: If the fund sells securities that have increased in price, the fund realizes a capital gain, which most funds also pass on to investors in a distribution.
  3. Capital gains distribution: When the fund's shares increase in price, you can sell your mutual fund shares for a profit in the market.

When researching the returns of a mutual fund, you'll typically come upon a figure for the "total return," or the net change in value (either up or down) over a specific period. This includes any interest, dividends, or capital gains the fund has generated along with the change in its market value during a given period. In most cases, total returns are given for one, five, and 10-year periods, as well as from the day the fund opened or inception date.

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