Mutual Funds Definition
You don't have to use a brokerage account to buy mutual fund shares. You can open an account with most funds directly or through your bank. With so many different kinds of mutual funds, you are sure to find ones that match your investment goals and risk tolerance.
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Definition
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A mutual fund is a portfolio of securities formed by pooling the money of many investors. Professional managers do the research and make the investment decisions based on the goals of a particular fund. For most funds, the price per share that investors pay is determined by dividing the fund's net asset value (NAV) by the number of outstanding shares. When an investor adds funds, new shares are issued; when someone liquidates their holdings, the shares are redeemed by the fund. There are some "closed-end" funds that issue a limited number of shares, which investors buy and sell on the market much as they do stocks. Share prices for closed-end funds are determined by market forces rather than the NAV.
Load Funds
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Mutual funds can be either load or no-load funds. Load funds charge sales commissions in addition to fees for operating expenses. The commission goes to brokers and other financial advisers who market the fund to investors. Loads are deducted from the money you invest, either up front or when you sell your shares.
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No-Load Funds
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No-load funds do not charge commissions. They charge fees to cover management and administrative costs, which the fund's expense ratio represents. The expense ratio is the percentage of the fund's assets spent on operating costs annually. You can determine what the fees a mutual fund charges by checking a fund's prospectus. The prospectus also describes the fund's terms, performance history and management.
Growth Funds
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Mutual funds are designed to produce investment growth, income or a combination of the two. Growth funds invest primarily in stocks. The fund managers select stocks that they think will increase in value. Some growth funds pursue more aggressive strategies than others and take more risks to produce higher returns. These aggressive stock funds may include other securities, such as stock options. Some stock funds specialize in certain areas. For example, a fund may buy primarily foreign stocks or focus on a particular type of industry, such as biotechnology.
Income Funds
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Some investors, such as retirees, seek income more than investment growth. For these investors, income mutual funds are the preferred choice. Most income funds invest primarily in government or corporate bonds. Many also hold stocks that pay high dividends and carry less risk than growth funds, such as preferred shares or stock in regulated utilities. Still other mutual funds pursue a mixed strategy by investing in both growth stocks and income-producing securities.
Money Market Funds
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The SEC defines a money market fund as a mutual fund that invest only in short-term corporate or government bonds with average maturities of 90 days or less. Technically, a money market fund is a bond fund, but with some special features. Money market funds allow investors ready access to their money, including check-writing privileges, as long as a minimum balance is maintained.
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