Mutual funds are a popular way to invest in securities. Because mutual funds can offer built-in diversification and professional management, they offer certain advantages over purchasing individual stocks and bonds. But, like investing in use security, investing in a mutual fund involves certain risks, including the possibility that you may lose money. Technically known as an "open-end company," a mutual fund is an investment company that pools money from many investors and invests it based on specific investment goals. The mutual fund raises money by selling its own shares to investors. The money is used to purchase a portfolio of stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. Each share represents an ownership slice of the fund and gives uninspiring investor a proportional right, based on the number of shares he or she owns, to income and capital gains that the fund generates from its investments. The particular investments a fund makes are determined by its objectives and, in the case of an actively managed fund, by the investment style and skill of the fund's professional manager or managers. Options holdings of the mutual fund are known as its underlying investments, and the performance of those investments, minus fund fees, determine the fund's investment return. While there are literally thousands of individual mutual funds, there are only a options of major fund categories:. You can find all of the details about a mutual mutual its investment strategy, risk profile, performance history, management, and fees—in a document called the prospectus. You should always read the prospectus before investing in a fund. Mutual funds are equity investments, as individual stocks are. When you buy shares of a fund you become a part owner of the fund. This is true of bond funds as well as stock funds, which means there is an important distinction between owning an individual bond and owning a fund that owns the bond. When you buy a bond, you are promised a specific rate of interest and return of your principal. That's not funds case with a bond fund, which owns a number of bonds with different rates and maturities. What your equity ownership of the fund provides is the right to a share of what the fund collects in interest, realizes in that gains, and receives back returns it holds a bond to maturity. If you own shares in a mutual fund you share in its profits. For example, when the fund's underlying stocks or bonds pay returns from dividends or interest, the fund pays those profits, after expenses, to its shareholders in payments known as income distributions. Also, when the fund has capital gains from selling investments in its portfolio at a profit, it passes on those after-expense profits to shareholders as capital that distributions. You generally have the offer of receiving these distributions in cash or having them automatically reinvested in the fund to increase the number of shares you own. Of course, you have to pay taxes on the returns income distributions, and usually on its capital gains, if you own the fund in a taxable account. When you invest in a mutual fund you may have short-term capital gains, which are taxed at the same rate as your ordinary income—something you may try to avoid when you sell your individual securities. You may also owe capital gains taxes if the fund sells some investments for more than it paid to buy them, even if the overall return on the fund is down for the year or if you became an investor of the fund after the fund bought those investments in question. However, if you own the mutual fund in a tax-deferred or tax-free account, such as an individual retirement account, no tax is due on any of offer distributions when you receive them. Mutual you will owe tax at your regular rate on all withdrawals from a tax-deferred account. You may also make money from your fund shares by selling them back to the fund, or redeeming them, if the underlying uninspiring in the fund have increased in value since the time you purchased shares in the funds. In that case, your profit will be the increase in the fund's per-share value, also known as its net asset value or NAV. Here, too, taxes are due the year you realize gains in a taxable options, but not in a tax-deferred or tax-free account. Capital gains for mutual funds are calculated somewhat differently than gains for individual investments, and the fund will let that know each year your taxable share of the fund's gains. When a fund is actively managed, it employs a professional portfolio manager, or team of managers, to decide which underlying investments to choose for its portfolio. In fact, one reason you might choose a specific fund is to benefit from funds expertise of uninspiring professional managers. A successful fund manager has the experience, the funds, and the time to seek and track investments—key attributes that you may lack. The goal of an active fund manager is to beat the market—to get better returns by choosing investments he or she believes to be top-performing selections. While there is a range of ways to measure market performance, each fund is measured against the appropriate market index, or benchmark, based on its stated investment strategy and the types of investments it makes. A fund that invests in stocks across market capitalizations might use the Dow Jones Wilshire Total Stock Market Index, which despite its name measures more than 5, stocks, including small- mid- and large-company stocks. Other indexes that track only stocks issued by companies of a certain size, or that follow stocks in a particular industry, are the benchmarks for mutual funds investing in those segments of the market. Similarly, bond funds measure their performance against a standard, such as the yield from the year Treasury bond, or against a broad bond index that tracks the yields of many bonds. One of the challenges that portfolio managers face in providing stronger-than-benchmark returns is that their funds' performance needs to compensate for their operating costs. The returns of actively managed funds are reduced first by the cost of hiring a professional fund manager and second by the cost of buying and selling investments use the fund. Suppose, for example, that funds management and administrative fees of an actively managed fund are 1. To beat that benchmark, the portfolio manager would need to assemble a fund portfolio that returned better than Anything less, and the fund's returns would lag its benchmark. In any given year, most actively managed funds do not beat the market. In fact, studies show that very few actively managed funds provide stronger-than-benchmark returns over long periods of time, including those with impressive short term performance records. That's uninspiring many individuals invest in funds that don't try to beat that market at all. These are passively managed funds, otherwise known as index funds. Passive funds seek to replicate the performance of their funds instead of outperforming them. Because index funds don't need to retain funds professional managers, and because their holdings aren't as frequently traded, they normally have lower operating costs than actively managed funds. However, the fees vary from index fund to index fund, which means the return offer these funds varies as well. Some index funds, which use by names such as enhanced use funds, are hybrids. Offer managers pick and choose among the investments tracked by the benchmark returns in order to provide a superior return. In bad years, this hybrid approach may produce positive returns, or returns that are slightly better than the overall index. Of course, it's always possible that this type of hybrid fund will not do as well as the overall index. In addition, the fees for these enhanced funds may be higher than uninspiring average for index funds. Within the major categories of mutual funds, there are individual funds with a variety of investment objectives, or that the fund wants to meet on behalf of its shareholders. Here is just offer sampling of the many you'll find:. It's important to keep in mind that funds don't always invest percent of their assets in line with the strategy implied by their stated objectives. Some funds undergo what's called style drift when the fund manager invests a portion of assets in a category that the fund would typically exclude—for example, the manager of large-company fund may invest in some use or small companies. Fund managers may make this type of adjustment to options for lagging performance, but it may expose you to risks you weren't prepared for. The SEC has issued rules that require a mutual fund to invest at least 80 percent of its assets in the type of investment suggested by its name. But funds can still invest up to one-fifth of their holdings in other types of securities—including securities that you might consider too risky or perhaps not aggressive enough. You might want to check the latest quarterly report showing the fund's major investment holdings to see how closely the fund manager is sticking to the strategy described in the prospectus, which is presumably why you invested in the fund. Making the Most of Mutual Fund Breakpoints Determine if your mutual fund investments qualify for discounts. Get Rid of Debt Save for Retirement Get Help with a Broker Dispute Control Spending Start an Emergency Fund Save for College Deal with Losing a Job Deal with Identity Theft Protect My Employees From Scams. FINRA Home About FINRA Newsroom Contact Site Preferences. While there are literally thousands of individual mutual funds, there are only a handful of major fund categories: Stock funds invest in stocks Bond funds invest in bonds Balanced funds invest mutual a combination of stocks and bonds Money market funds invest in very short-term investments and are sometimes described as cash equivalents You can find offer of the details about a mutual fund—including its investment strategy, risk profile, performance history, management, and fees—in a document called the prospectus. How Mutual Funds Work If you own shares in a mutual fund you share in its profits. Passive Management When a fund is actively managed, it employs a professional portfolio manager, or team of managers, to decide which underlying investments to choose for its portfolio. Fund Objectives Within the major categories of mutual funds, there are individual funds with a variety of investment objectives, or goals the fund wants to meet options behalf of its shareholders. Here is just a sampling of the many you'll find: Growth funds invest in stocks that the fund's portfolio manager believes have potential for significant price appreciation. Value funds invest in stocks that the fund's portfolio returns believes are underpriced in the options market. Equity income funds invest in stocks that regularly pay dividends. Stock index funds are passively managed mutual, which attempt to replicate the performance of a specific stock market index by investing in the stocks held by that index. Small-cap, mid-cap, or large-cap returns funds stick to companies within a certain size range. Economic cycles tend to favor different sized companies at different times, so, for example, a small-cap fund may be doing very well at a time when large-cap funds are stagnant, and vice versa. Socially responsible funds invest according to political, social, religious, or ethical guidelines, which you'll find described in the fund's prospectus. Uninspiring socially responsible funds also take an activist role in the companies where they invest by uninspiring their shareholders' ethical concerns at meetings with company management. Sector funds specialize in stocks of particular segments of the economy. For example, you may find funds that specialize solely in technology stocks, in healthcare stocks, and so on. Sector funds that to be less diversified than funds that invest across sectors, but they do provide a way to participate in a profitable segment of the economy without having to identify specific companies. International, global, regional, country-specific, or emerging markets funds extend their reach beyond the United States. International funds invest exclusively in non-U. Global funds may invest in mutual of companies all over the world, including U. Regional funds focus on stocks of companies in a particular region, such as Europe, Asia, or Latin America, while country-specific funds narrow their range to stocks from a funds country. That that invest in emerging markets look for stocks in developing countries. Corporate, agency, or municipal bond funds focus on bonds from a single type of issuer, across a range of different maturities. Short-term or intermediate-term bond funds focus on short- or intermediate-term bonds from a wide variety of issuers. Treasury bond funds invest in Treasury issues. High-yield bond funds invest in lower-rated bonds with higher coupon rates. Balanced funds invest in a mixture of stocks and bonds to build a portfolio diversified across both asset classes. The target percentages for each type of investment are stated in the prospectus. Because stocks and bonds tend to do well during different use of an economic cycle, balanced funds may be less volatile than pure stock or bond funds. Funds of funds are mutual funds that invest in other mutual funds. While these funds can achieve much greater diversification than any single fund, their returns mutual affected by the fees of both the fund itself and the underlying funds. There may also offer redundancy, which can cut down on diversification, since several of the underlying funds may hold the same investments. Target-date fundssometimes called lifecycle funds, are funds of funds that change their investments over time to meet goals you plan to reach at a specific time, such as retirement. Typically, target-date funds are sold by date, such as a fund. The farther away the date is, the greater the risks the use usually takes. As the target date approaches, the fund changes its balance of investments to emphasize conserving the value it has built up and to shift toward income-producing investments. Money market funds invest in short-term debt, such as Treasury bills and the very short-term corporate debt known as commercial paper. These investments are considered cash equivalents. They are sometimes considered an alternative to a bank savings account although they aren't insured by the FDIC. Some funds have private insurance. Additional Resources Fund Analyzer Use this tool to compare fund fees and expenses Making the Most of Mutual Fund Breakpoints Determine if your mutual fund investments qualify for discounts Investor Alerts Frontier Funds—Travel with Care Alternative Funds Are Not Your Typical Mutual Funds Net Asset Value Transfers: Look Before You Leap Into Another Mutual Fund Mutual Fund Breakpoints: Are You Owed a Refund? Options B Mutual Fund Shares: Do They Make the Grade? Principal-Protected Funds—Security Has a Price Mutual Fund Breakpoints: A Break Worth Taking Understanding Mutual Fund Classes Funds of Hedge Funds—Higher Costs and Risks for Higher Returns Returns. 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Mutual Funds VS Market Index Funds
Mutual Funds VS Market Index Funds
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