- The definition of a mutual fund is an investment option in which your money is pooled with the money of other investors and then invested by a professional fund manager.There are three major types of investment funds:
- Equity fund - consists of investments coming from common stock. It can be riskier than other types of investments; but, with higher risk comes opportunities to earn more profit.
- Fixed-income fund - consists of corporate and government securities that provides investors with fixed returns with relatively lower risk.
- Balanced fund - combines bonds and stocks and the investments are pooled together. It may have low risks, but lower risks mean lower returns. It is therefore important for investors to first study how much risk they are willing to accept before making any type of investment.
An example of a mutual fund is an investment that invests in stocks from a specific industry, such as companies in the technology industry.
- a fund consisting of a number of diversified securities that is owned jointly by those who have purchased shares in it as an investment
- a company or corporation that manages such a fund or funds
mutual fund - Investment & Finance Definition
An investment company that pools money from shareholders and invests it in a portfolio of securities. More than 82 million Americans own shares in mutual funds. There are four primary types of mutual funds: stock, bond, money market, and hybrid (a mixture of stocks and bonds). In August 2002, 43 percent of mutual fund assets were stock funds; 35 percent were money market funds; 17 percent were bond funds, and 5 percent were hybrid funds.
There are four laws that govern the mutual fund industry:
- The Investment Company Act of 1940 requires all funds to register with the Securities and Exchange Commission and to meet certain operating standards.
- The Securities Exchange Act of 1934 sets out antifraud rules regarding the purchase and sale of shares.
- The Investment Advisors Act of 1940 regulates fund
Additionally, the National Associationof Securities Dealers Inc. oversees most mutual fund advertising and sales materials.
Investors typically need to make a minimum initial investment, which may be $1,000 or $2,500. For Individual Retirement Account investments, often the initial investment is a minimum of $500.
Fees fall into two categories: shareholder fees and annual operating expenses. Typically, shareholder fees are front-end loads that essentially are a sales charge assessed when a mutual fund is bought. Back-end loads assess the sales charge when fund shares are sold. A no-load mutual fund does not have any sales charges.
Annual operating expenses pay for the ongoing cost of running a fund, such as the fund manager’s salary and record keeping, printing, and mailing expenses. Also included in this category are 12b-1 fees, which are fees that are deducted from fund assets to pay for marketing and distribution expenses, such as a broker’s commission.
Some mutual funds have more than one class of shares available for purchase by the public: Class A, Class B, and Class C shares. (Another class, Class I shares, can be sold only to institutional investors.)
Definitions vary among mutual funds. Often Class A shares have a front-end sales load, while Class B shares charge a fee only when investors redeem fund shares. The fee may decrease to zero if the investor holds the shares for a certain period of time, or may just convert to a regular 12b-1 fee. Class C shares may have a 12b-1 fee and a contingent deferred sales load that would be lower than the other fees assessed on the Class A or Class B shares. See also 12b-1 fees.