Mutual Funds by Design (What Is a Mutual Fund?)

Step 1: What Is A Mutual Fund?

A mutual fund is an investment company that pools investors' money to invest in securities. An open-end mutual fund continuously issues new shares when investors want to invest in the fund, and it redeems shares when investors want to sell. A mutual fund trades directly with its shareholders, and the share price of the fund represents the market value of the securities that the fund holds.

There are several advantages that mutual funds offer individual investors. They provide:

• Professional investment management usually at a low cost, even for small accounts;
• A diversified group of securities that only a large portfolio can provide;
• Information through prospectuses and annual reports that facilitates comparisons among funds;
• Special services such as check writing, dividend reinvestment plans, telephone switching, and periodic withdrawal and investment plans;
• Account statements that make it easy to track the value of your investment and that ease the paperwork at tax time.

Successful investing takes time and effort, and it requires special knowledge and relevant, up-to-date information. Investors must spend a considerable amount of energy searching for opportunities and monitoring each investment. Professional investment management is relatively cheap with mutual funds. The typical adviser charges about 0.5% annually for managing a fund's assets. For an individual making a $10,000 investment, that comes to only $50 a year.

Of course, mutual fund investing does not preclude investing in securities on your own. One useful strategy would be to invest in mutual funds and individual securities. The mutual funds would ensure your participation in overall market moves and lend diversification to your portfolio, while the individual securities would provide you with the opportunity to apply your specific investment analysis skills.

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