mutual fund is a pool of money provided by individual investors,
companies, and other organizations. A fund manager is then hired
to buy and sell stocks or bonds within the fund. There are of course
advantages and disadvantages to mutual funds. Advantages include
diversification which provides holdings of several different companies.
Liquidity which means that just like individual stocks, a mutual
fund can easily be converted to cash. And professional management
which means that because this is the primary occupation for a fund
manager, he or she can devote more time to selecting an investment.
Professional management however can also fall into the category
of disadvantages. This is because sometimes the average mutual fund
manager is not any better than a nonprofessional. Other disadvantages
include a lack of control, someone else is making the decisions.
Dilution which means that because funds are scattered among so many
holdings, a great performance by a fund's top holdings rarely makes
much of a difference in a mutual fund's total performance. And buried
costs that are hidden from clients.
of the general categories of mutual funds include:
Bond Funds. Bond mutual funds are pooled amounts
of money invested in bonds. Bonds are considered "fixed-income"
investments because the amount of interest paid is fixed at a set
percentage of the amount invested.
Balanced Funds. Balanced funds are usually made
up of both stocks and bonds. It's important to know the proportion
of stocks and bonds so that you understand the potential risks and
rewards in that fund.
General Equity (Stock) Funds. These funds are invested
in stocks. They are usually classified into three different categories
in terms of their market capitalization (the total dollar value
of all outstanding shares, which is calculated by multiplying the
number of shares times the current market price): large-cap, medium-cap,
and small-cap funds.
International/Global Funds. International
funds invest in companies outside of the U.S. and global funds invest
in companies both inside and outside of the U.S. These funds are
typically more volatile.
Sector Funds. Also volatile, sector funds invest
in a particular sector of the economy, such as technology or financial.
Mutual Fund Advantage
Wisely: An Introduction to Mutual Funds
Basics: Mutual Funds
101: Mutual Funds
Fund Investor's Center
in Socially Responsible Funds