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What are the Mutual Fund Basics?

By Felicia Dye
Updated May 17, 2024
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A mutual fund is a type of group investment. Numerous parties invest money in a number of financial instruments that are chosen and managed by a professional. When a person invests, she buys ownership of a portion of this pool of financial instruments. Other mutual fund basics that new investors may want to be aware of are fees and distribution options.

Mutual funds are collections of financial instruments. A single mutual fund can include a number of stocks, bonds, and money markets or a mixture of these, which are often referred to as holdings. When a person invests in a mutual fund, she gets shares, or portions of ownership. One of the mutual fund basics that should be made clear to all investors is that having ten shares does not mean that an individual owns ten shares of any particular financial instrument. Instead, she owns ten shares of the whole mutual fund.

The financial instruments held by a mutual fund are professionally chosen and managed. Investors do not generally pay the portfolio manager. His compensation is usually derived from fees.

Investing in mutual funds is not free. The fees that investors may be subject to pay for management of the fund can be significant and they are often presented in such a way that the average investor cannot determine exactly what she is paying for. In addition to these fees, many investors will be subject to upfront or back-end loads, which are costs for buying into a mutual fund or costs for selling the shares a person owns. Financial advisers encourage investors to make a fund's fees one of the considerations on which they base their decision when choosing which mutual fund to invest in.

Another of the mutual fund basics that is important for beginners to be aware of is the option to reinvest. When money is earned from stock dividends, for example, many investors may receive checks for their portion of the profit. Those who do not want to receive distributions, however, can keep them invested in the mutual fund.

When a person no longer wishes to continue investing in a mutual fund, she can liquidate her shares. They may not always be worth as much as they were when she first invested. One of the more bitter mutual fund basics is the fact that profits are not guaranteed. Just as an individual stock could lose money, a mutual fund can also lose money.

Mutual funds are highly regulated by the Securities Exchange Commission (SEC). One of the regulations that should interest new investors is the requirement that every mutual fund must have a prospectus. This is a document that basically serves as an orientation to the fund, providing information such as investment strategies and fees.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

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