Definition of a Mutual Fund

Definition of a Mutual Fund

A mutual fund is a type of investment vehicle that pools money from multiple investors and invests the funds in a diversified portfolio of securities such as stocks, bonds, and money market instruments. Mutual funds are managed by professional money managers who use their expertise to select the securities and manage the portfolio. Investors in mutual funds own a portion of the fund, which is represented by shares.

Mutual funds are popular among investors because they offer a convenient way to invest in a diversified portfolio of securities without having to select and manage individual investments. They also offer flexibility, as investors can buy and sell shares at any time, and liquidity, as shares can be redeemed for cash at the net asset value (NAV) of the fund at the end of the trading day.

There are many different types of mutual funds, including equity funds, fixed-income funds, money market funds, and balanced funds. Each type of fund has a different investment objective, risk profile, and asset allocation. Investors can choose a mutual fund that aligns with their investment goals, risk tolerance, and time horizon. Overall, mutual funds offer investors an accessible and diversified way to invest in the financial markets.

The pooling of resources is the biggest strength for mutual funds. The relatively lower amounts required for investing into a mutual fund scheme enables small retail investors to enjoy the benefits of professional money management and lends access to different markets, which they otherwise may not be able to access.

A mutual fund typically focuses on specific types of investments. For example, a fund may invest mainly in government bonds, stocks from large companies or stocks from certain countries. Some funds may invest in a mix of stocks and bonds, or other mutual funds.