What is a Mutual Fund?

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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 adviser."

A mutual fund 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 mutual fund owns 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 hard for investors to become experts on various businesses for example, what are the best steel, automobile, or telephone companies, investors often depend 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 don't 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.

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About the Author

John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the www.directonlineloans.co.uk website.


mrinal 23.04.2011. 11:58

What is mutual fund, how to invest in MF and what is the best MF to invest at this current market position? I am a new investor, I want to invest in mutual fund. But I have not any idea regarding MF that means what is MF, is it a safe investment or nor, how to invest in MF etc. So kindly guide me regarding this.


Admin 23.04.2011. 11:58

A mutual fund in an investment vehicle that pools together money from many investors and allows you to invest in dozens, hundreds, or thousands of companies all at once and so there is less risk. This protects you if any one company or industry runs into trouble. The contents of the fund is chosen by a fund manager(s) or for an index fund tries to mimic the contents of a whole market or section.
You need to think about your risk tolerances in choosing what fund is best for you, not to mention where you are investing through. Both are extremely important. If you want something safer there is something like the Total Stock Market index or S&P 500, but if you want to take on some more risk or some potentially better returns there is a wide range to choose from, such as small or mid-caps, sector specific funds like Energy or Health Care, or international funds like Europe, Pacific, or Emerging Markets. It would be wise to have a diversified portfolio.
As to how safe they are, they are far safer than throwing your money into individual companies and hoping for the best. If you chose a winner you could get a lot more, but if you didn't you could lose a large amount of your investment. Your time horizon is very important as well. The more time you have the more risk you can take on since you have a chance to recover if the market declines. Ultimately it is your decision though.
Where you put your money is also very important. Some of the best are Vanguard, T. Rowe Price, Fidelity, and Schwab. Avoid the big banks like the plague. Don't let them rip you off with loads (sales charges) and fees. Check how much the company charges you as an expense ratio. A good one might charge you 0.2-0.8 %. If they charge more than 1% than go somewhere else. And if they charge any kind of 12b-1 fee, hold on to your wallet and RUN. If you want to check, go to a site like
Morningstar or http://finance.yahoo.com and check each fund. Vanguard has some of the lowest expense ratios anywhere.
Many places will hit you with high front end sales loads, ripoff 12b-1 fees and stiff expense ratios. That could rob you of potentially tens or even hundreds of thousands of dollars over your working career. If you want to see a demonstration of this, look at https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost and compare.
Read some basic books to teach you the fundamentals. Three excellent reads are Mutual Funds for Dummies, The Complete Idiot's Guide to Investing, and Investing for Dummies. You can probably find them in your local library. Before doing anything, make sure you have enough in savings in case things go south for at least 6 months.


ratmforever 11.12.2007. 13:50

Is it wise to invest in different mutual fund companies or just one? Is it wise to invest in different mutual fund companies or just one company for maximum returns? My reason is that in case Company A fails, I still have a backup with other companies.

What is your opinion on this, will it matter if I invest in different companies? What are the chances that a mutual fund company will actually fail/close?
About diversification: isn't mutual funds already in itself diversification?


Admin 11.12.2007. 13:50

Mutual Fund companies tend to not fold, but I can understand your concern. But generally when people invest in funds they look at different types of funds - like large cap domestic, international, small cap domestic, emerging markets, etc. It certainly can't hurt you to go with different fund companies.

I suggest you take a look at index funds - Vanguard and Fidelity have some good ones. They invest in a variety of markets and beat mutual funds over time. They also have low expense ratios. So if you want to look at seperate fund companies take a look at some of Vanguard's index funds.


GooseV 31.10.2007. 02:04

Do I have to pay capital gains and dividend tax on a Mutual Fund I plan to keep for 5 years? I own some shares of a mutual fund. Will I be taxed in the coming years on the capital gains and dividends, even if I reinvest them and do not sell any shares?
And in what way will I be taxed?


Admin 31.10.2007. 02:04


Each year when your mutual fund earns dividends or capital gains, you receive your share and it is reported to the IRS on a 1099DIV. You receive a copy of the 1099DIV.

You report the information from the 1099DIV on your tax return, normally on Schedule B. This income is taxable in the year distributed by the fund, whether you reinvest the income or receive it as cash. If you reinvest this income in the fund, it is added to your original investment and will not be taxed again (your "basis").

When you sell the mutual fund, if the selling price is more than your basis in the fund, you will pay capital gains tax on the increase in value.


Roger J 11.04.2010. 15:36

How do I figure the cost basis on an inherited mutual fund? I inherited a mutual fund in 2006 as a "transfer upon death," and redeemed most of what was left in 2009. How can I figure the cost basis for tax purposes?
Thanks for all the information, everyone.

Roger J

Admin 11.04.2010. 15:36

Cost basis - use what the value was when you inherited it. You should be able to find that at Yahoo finance among other places, or the mutual fund itself can give you the info.


royalgiant 04.10.2009. 01:09

What mutual fund books is good for beginners? New, to mutual funds i would like to familiarize myself with it before getting into it, would like to know the ins and outs, what type of fund to pick and what type not to pick...

Preferably I would like some recommendations on books meant for Canadians, but if there are books that teaches Great and sound principles for mutual fund investing i'd like that too!

So thanks for your recommendations on books


Admin 04.10.2009. 01:09

These two will give you a great foundation:



There is so much info out there, it is easy to get paralyzed by information overload. Remember, many studies have shown that your investing HABITS (i.e., consistent, systematic investing) have way more impact on your investing results than which specific fund(s) you choose.

I hope that helps. Good luck!


LAinCM 03.11.2008. 23:29

What do you do about taxes when being named a beneficiary on a mutual fund account? I will be receiving a mutual fund account that I was named a beneficiary on. My question is how or if I will owe taxes on it? I'm not sure of the amount of the fund, but if it is transferred into my name what do I do? Or can it be sold off first, and then transferred. What do you know about taxes on this matter? Any suggestions are helpful as to what you would recommend. Thanks.


Admin 03.11.2008. 23:29

I assume the person has died and you are the beneficiary. You need to ask the mutual fund company what the value per share was on the date of death. That is your cost basis when you sell the shares.


Ask 17.12.2012. 15:20

How do I gain profit by investing in a mutual fund and is it worth it? I am new to investing and I know that investing in mutual funds is a long term investment. Currently, I am using Scottrade as my brokerage. I was looking to invest in mutual funds but I am confused as to how they work. Many of the top rated mutual funds show an annual growth of around 20%, however, that number is not reflected in their stock value.

Say, I invested $2500 in a certain mutual fund for a year. The mutual fund has a 20% trailing rate that year. Does that mean that I gained $500 and where do I see those earnings.



Admin 17.12.2012. 15:20

First of all most mutual funds do not make 20% year
after year. Second, you do not need a broker to invest
in mutual funds. Third, most all mutual funds offer what's
called diversification. They can invest in hundreds of
stocks and bonds. $2500 is the entree cost to buy a fund.
Call one of these fund companies and a representative
will help you get started. TR Price 1 800 638 5660,
Fidelity 1 800 544 8544, American Century 1 800 345 2021.
Make sure you use the Roth IRA along with any investments.


nagesh M 27.01.2008. 14:49

which is the best type of mutual fund that will minimize the income tax. What is ELSS? I heard ElSS is the mutual fund option for reducing the income tax for a salaried employee. I wanted to know which company's funds are having good returns now?

nagesh M

Admin 27.01.2008. 14:49

Equity linked savings scheme

Under section 80, Indians can invest upto Rs 1 lakh in ELSS (Equity Linked Saving Scheme, also commonly known as Tax Saver schemes) funds per year/per individual. The amount invested in a ELSS/Tax Saver scheme is Tax deductible on your tax return.

Now, what is the catch for investing in a ELSS scheme.

(a) Your invested money is LOCKED for a period of 3 years. i.e., Once invested in a Tax Saver fund, your money cannot be taken out for a period of 3 years. But this is a blessing in disguise, because Tax Saver funds generally yield healthy returns during a 3 year period.

(b) Except for the Pension plan funds which usually locks the money until the age of 58 or so, all ELSS schemes invest upto a 100% in equities/stocks. Therefore, inherently investing in a ELSS is risky.

Comparing equity mutual fund and a tax saving one, I would say Tax saving funds generally perform better because there is less pressure on the Tax Saving fund manager to SELL during down markets for redemption to unit holders.

With plain vanilla Equity MFs you could buy them today and dispose of them tomorrow - i.e., there is no time limit for redemption, except for exit loads. However with ELSS MF funds, there is a compulsory 3 YEAR lock in for Equity funds and a mandatory lock in up to the age of 58 years for Pension funds.

Contrary to the popular theories, ELSS funds also comprises of Pension fund, such as Franklin Pension, which does not invest more than 50 to 60% in equities.


Matthew 18.08.2011. 23:24

How do I invest in a mutual fund? How do I invest in a mutual fund without consulting a financial advisor. I don't want to pay somebody fees for something as simple as a mutual fund. Which is a good site to go to? Any tips?


Admin 18.08.2011. 23:24

The problem is trying to weed through the Duds,..and there's plenty of them.

A Mutual Fund Almanac tracks funds and works up Top20 list for each sector.Morningstar and Association of Individual Investors,..aaii.com

Also ..Investment letters that gather those stellar funds and track them..moneyletter.com
Once you've chosen that favorite fund you call them and ask them to send you a "Prospectus",..or better yet use the Investment letter to choose then buy it through your Discount Broker...
The advantage of buying through a discount broker is you buy exactly what funds you want, irrelevant to the fund family it might belong to..(everything on one set of tax forms)
Either way works..Best of Luck..Now,s a good time to start.


audidriver79 05.01.2009. 04:03

What exactly is a mutual fund, and how do I invest in one? I have some settlement money (about $28K) that I would like to invest. Everyone tells me to put it in a mutual fund. Can someone explain to me what exactly a mutual fund is? Will I be able to cash it out whenever, or do I have to keep it in for a certain number of years? Can I buy a mutual fund through Scottrade? What's the best mutual fund?


Admin 05.01.2009. 04:03

First what is a Mutual fund?
It is a fund, managed usually by a team of people. This fund invests money in different securities. There are many different types of mutual funds. Some funds buy just stocks, they are made up of many different company's stock. They may have several million in GE, Exon Mobile, Wal Mart etc. Next, there are bond funds which invest in many different types of bonds. Some corporate bonds, government bonds, and municipal bonds. There are also index funds, which invest in certain securities associated with a certain index. For instance, there are S&P 500 index funds, meaning the fund mimics the S&P 500. So if the S&P is up 2% than your fund is up 2% for the day. This is the basic plot for mutual funds, there are many more types.

Owning a mutual fund is like owning shares of stock. You can cash out when ever, there is no time limit or constraint.

While you can buy mutual funds over the internet, it is best to go to a broker. There is usually no commission fee to purchase a mutual fund as would if you were buying stocks. Being new to invseting, you should get the advise of a broker.

There is no best mutual fund, there are thousands of them, and certain people like certain funds. Some grow slow and steady with lower risk, while others have potential to grow very fast, but with more risk. Its a complicated concept at first, but you are making the right decision by investing in a mutual fund.


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