Mutual Fund Definition

A mutual fund is an investment vehicle that pools together money from many individual investors to collectively invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional portfolio managers, mutual funds aim to provide investors with diversified investment options that might be difficult to achieve on their own. The managers make decisions about how to allocate the fund's assets, using their expertise to select a mix of investments that align with the fund's stated objectives, whether they are focussed on growth, income, or a combination of both.

Investors purchase shares in a mutual fund, and each share represents a portion of ownership in the fund and its underlying assets. The value of these shares, known as the net asset value (NAV), fluctuates based on the performance of the investments within the fund. Mutual funds are typically structured as open-end funds, which means that new shares can be created and redeemed on demand based on the fund's current NAV, allowing for flexibility in investment amounts and liquidity for investors.

There are various types of mutual funds, including equity funds, which invest primarily in stocks; fixed-income funds, which focus on bonds; and balanced funds, which aim to provide a mix of stocks and bonds. Additionally, there are index funds that seek to replicate the performance of a specific market index and actively managed funds where the fund managers actively select and trade investments to outperform the market. Mutual funds charge fees for management and administration, which can affect overall returns, but they also provide individual investors access to professional management and a broad range of investment opportunities that might otherwise be inaccessible.