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What is a Mutual Fund?

A mutual fund is a type of investment that allows you to buy a collection of stocks, bonds or other securities as opposed to investing in one individual company at a time.

Through a mutual fund, money is pooled together and professionally managed on your behalf, sparing you the burden of having to research, purchase and trade individual stocks or bonds on your own. However, there are different types of mutual funds that you can choose to invest in. For example, some mutual funds are comprised solely of international companies; others may be comprised of companies within a certain industry.

For over 75 years, mutual funds have provided a way for individual investors to access the stock and bond market. In fact, as of the end of 2019, the total net assets of mutual funds in the United States amounted to $21.3 trillion, according to the Investment Company Institute. Many of these households own mutual funds through their 401(k) plan or through an individual retirement plan (IRA).

The reason for the continued attractiveness of mutual funds stem from the following advantages:

Potential Advantages

  • Diversification. As noted earlier, mutual funds invest in an assortment of companies, which is a great way to avoid “putting all your eggs in one basket.”
  • Low Initial Investment. In other words, you don’t need a lot of money to start investing. Mutual funds give you access to investments for relatively little money, as many mutual funds have a low initial investment of just $1,000.
  • Professional Management. Portfolio managers have the expertise to research stocks or bonds and make investment decisions on an ongoing basis.
  • Convenience. Buying and selling mutual fund shares is easy. Investing can be done via automatic purchases, through your 401(k) plan or by simply writing a check.

A Word about Fees
Mutual funds charge an ongoing fee called the expense ratio, which is built into the price of the fund each day. These expenses are automatically deducted for the cost of managing the fund and ongoing operating expenses. Expect the expense ratio to differ from fund to fund.

Jemma Everyday Wisdom: Mutual funds are investment vehicles that invest in a collection of stocks and bonds, which provide a number of benefits over investing in single companies individually.

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