Ever wondered what is a mutual fund? A mutual fund is a pool of money run by a professional or group of professionals called the "investment advisor." It is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments.
The combined holdings the fund owners are known as its portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate.
Because it is sometimes difficult for investors to become experts on various businesses for example, what are the best steel, automobile, or telephone companies, investors often rely on professionals who are trained to investigate companies and recommend companies that are likely to succeed.
In a managed mutual fund, after investigating the prospects of many companies, the fund's investment adviser will pick the stocks or bonds of companies and put them into a fund. Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall.
Investors may typically pay a fee when they buy or sell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund.
Even small fees can and do add up and eat into a significant chunk of the returns a mutual fund is likely to produce, so you need to look carefully at how much a fund costs and think about how much it will cost you over the amount of time you plan to own its shares.
If two funds are similar in every way except that one charges a higher fee than the other, you'll make more money by choosing the fund with the lower annual costs.
Past performance is not a reliable indicator of future performance. So do not be dazzled by last year's high returns. But past performance can help you assess a fund's volatility over time.
Making any sort of investment involved a certain amount of risk so it is always wise to seek the advice of a professional before making any decisions.