what is mutual funds

Definition of mutual funds

A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks,bonds, short-termmoney market instruments, and/or other securities

In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or intrest income The investment proceeds are then passed along to the individual investors.

The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding


Advantages of Mutual Funds
1) A professional skilled in choosing stocks does all of your work for you.
2) A mutual fund gives you instant diversification.
3) A fund exists for every financial goal and risk tolerance level.
4) Mutual funds are also quite liquid. A mutual fund investment can be converted into cash upon your request.

Disadvantages of Mutual Funds

As with any type of investment, there are drawbacks associated with mutual funds.

1) Mutual fund investors have no control over what to invest in. Unlike picking your own individual stocks, a mutual fund puts you at the mercy of the manager.

2) Mutual funds generally have only small holdings of so many different stocks. When a fund’s top holdings jump to high numbers, this doesn’t make much of a difference in a mutual fund’s total performance. There is really just small gain realized from even top the top performing stocks. This is caused by over diversification.

3) There are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.Funds will typically have a range of different fees that reduce the overall payout. Often, these fees are not well explained to investors

4) Changing market conditions can create fluctuations in the value of a mutual fund investment.


5) Misleading AdvertisementsThe misleading advertisements of different mutual funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap or income.


6) Evaluating Funds Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc.Past performance doesn’t provide exact information for future performances, it can only assist you appraising fund’s volatility over time.


Prospectuses will not contain all the costs that affect the net return on your investment. This is why it is important to compare net returns whether or not the fund in a no-load or load fund.