A brief introduction to Mutual Funds

A popular method of investing money, available to virtually everyone today, is the Mutual Fund. At its heart, a mutual fund regularly collects modest amounts of money from many small investors, pooling it all to create a fairly large investment fund. It is through the pooling of these resources into a large investment amount that a mutual fund can simultaneously invest in several stock and bond offerings.
Employing the services of a professional money manager, this large pot of money is then invested for the benefit of the investors. As the funds’ total investments grow, so too does the value of each individual investor’s share. The vast majority of the investing public have neither the resources, nor expertise to actively manage their individual stock and bond holdings. A mutual fund therefore allows these small, and disparate shareholders to pool their resources to employ a more capable money manager than they would have been able to do individually.
Mutual funds generally invest exclusively in bonds or stocks. Stock market investment involves buying shares in one of the many companies that are listed on the various stock exchanges around the globe. Owners of shares or stock in a company, are the direct beneficiaries of profits the company makes, dividends it pays, and any increase in the value of its shares as a company prospers. In short, the owners of any stock in any company own a piece (however small) of that company.
Bonds on the other hand, represent loans made to companies, governments and government agency directly by investors. Unlike shares, the full amount of the loan is usually paid back, in a specific time frame, along with all and any outstanding accrued interest. Bonds can normally be bought and sold on the open market, through brokers, like most shares and stocks. The difference is that buying or investing in a bond, is essentially purchasing a promise to have the capital (loan amount) and interest repaid over a specified amount of time. Since all other things being equal, the amount of the loan, the interest rate, and payback period tend to be predictable, mutual funds investing in bonds have lower risk, lower volatility, and lower (albeit steadier) returns. It must be stressed however, that just like shares, the value of bonds may rise and fall over time. Generally, rising market interest rates mean a fall in the value of a bond, whilst the reverse is also true.
The specific shares and bonds that a mutual fund will invest in, will depend on the investment decisions made by the fund manager, guided by the stated objectives and aims of the specific fund. For example, some funds might specialize in municipal bonds, whilst others will invest only in companies in emerging markets, or a particular industry.
As an investor in a mutual funds, you do not actually own any shares or bonds that the mutual fund might have invested in. The mutual fund owns those investments. What you do own, is a share of the value of the total holding of the mutual fund. When you invest in a mutual fund therefore, you are putting your trust in the fund manager to make the best investment decisions with your invested capital.
It is also worth noting too, that while the trading, sale and operation of mutual funds is regulated by the Securities and Exchange Commission (SEC), this does not guarantee the value and performance of any investments that a fund manager might make with your money. It is quite possible therefore, to lose money invested in a mutual fund. That said, no mutual fund has ever collapsed or gone bankrupt in the 70 year history of the Investment Company Act of 1940, which is the primary piece of legislation governing mutual funds.

A popular method of investing money, available to virtually everyone today, is the Mutual Fund. At its heart, a mutual fund regularly collects modest amounts of money from many small investors, pooling it all to create a fairly large investment fund. It is through the pooling of these resources into a large investment amount that a mutual fund can simultaneously invest in several stock and bond offerings.
Employing the services of a professional money manager, this large pot of money is then invested for the benefit of the investors. As the funds’ total investments grow, so too does the value of each individual investor’s share. The vast majority of the investing public have neither the resources, nor expertise to actively manage their individual stock and bond holdings. A mutual fund therefore allows these small, and disparate shareholders to pool their resources to employ a more capable money manager than they would have been able to do individually.
Mutual funds generally invest exclusively in bonds or stocks. Stock market investment involves buying shares in one of the many companies that are listed on the various stock exchanges around the globe. Owners of shares or stock in a company, are the direct beneficiaries of profits the company makes, dividends it pays, and any increase in the value of its shares as a company prospers. In short, the owners of any stock in any company own a piece (however small) of that company.
Bonds on the other hand, represent loans made to companies, governments and government agency directly by investors. Unlike shares, the full amount of the loan is usually paid back, in a specific time frame, along with all and any outstanding accrued interest. Bonds can normally be bought and sold on the open market, through brokers, like most shares and stocks. The difference is that buying or investing in a bond, is essentially purchasing a promise to have the capital (loan amount) and interest repaid over a specified amount of time. Since all other things being equal, the amount of the loan, the interest rate, and payback period tend to be predictable, mutual funds investing in bonds have lower risk, lower volatility, and lower (albeit steadier) returns. It must be stressed however, that just like shares, the value of bonds may rise and fall over time. Generally, rising market interest rates mean a fall in the value of a bond, whilst the reverse is also true.
The specific shares and bonds that a mutual fund will invest in, will depend on the investment decisions made by the fund manager, guided by the stated objectives and aims of the specific fund. For example, some funds might specialize in municipal bonds, whilst others will invest only in companies in emerging markets, or a particular industry.
As an investor in a mutual funds, you do not actually own any shares or bonds that the mutual fund might have invested in. The mutual fund owns those investments. What you do own, is a share of the value of the total holding of the mutual fund. When you invest in a mutual fund therefore, you are putting your trust in the fund manager to make the best investment decisions with your invested capital.
It is also worth noting too, that while the trading, sale and operation of mutual funds is regulated by the Securities and Exchange Commission (SEC), this does not guarantee the value and performance of any investments that a fund manager might make with your money. It is quite possible therefore, to lose money invested in a mutual fund. That said, no mutual fund has ever collapsed or gone bankrupt in the 70 year history of the Investment Company Act of 1940, which is the primary piece of legislation governing mutual funds.

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