MUTUAL FUNDS

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

Mutual funds are baskets of stocks or bonds. They come in all different shapes and sizes, from covering broad stock market indexes to focusing on specific sectors.

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 in 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 all of the details about a mutual fund—including 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 the 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 capital gains, and receives back if it holds a bond to maturity.