Investments

What Is A Mutual Fund?

A mutual fund represents a pool of investments, usually with a specified goal or focus. A mutual fund purchases securities with money it receives from the sale of its shares. A mutual fund is managed by one or more individuals. Often, the mangers of a mutual fund are associated with a brokerage firm.

Types of Mutual Funds

Mutual funds may be open-end or closed-end. The difference is as follows:

Open-end - The majority of mutual funds traded on public exchanges are open-end mutual funds. The designation "open-end" means that the mutual fund will sell as many of its shares as investors demand.

Closed-end - A closed-end mutual fund usually makes only one offering of its shares. After the initial offering, the fund no longer sells its shares directly to the public; however, an investor may obtain shares of such a fund through a purchase on a public exchange.

It may be that an open-end fund will convert its status to closed-end if demand for shares in the fund becomes too great.

What Are The Advantages/Disadvantages Of Investing In Mutual Funds?

The biggest advantage a mutual fund offers is that it affords an investor the opportunity to own a wide variety of securities, without the expense and effort of making a separate purchase of each security. Moreover, investors have the benefit of the fund manager's expertise. Lastly, a mutual fund offers an investor an opportunity to buy various stocks in one particular area of interest to the investor. In doing so, the investor spreads his or her risk out over all of the securities in the mutual fund.

In the way of disadvantages, the costs associated with the management of a mutual fund may diminish an investor's return on his or her investment. Also, while an expert fund manager is an advantage, an ineffective fund manager may result in the investor failing to profit from his or her investment.

Considerations In Investing In A Particular Mutual Fund

For an investor, it is extremely important to gain an adequate understanding of any investment opportunity before making a commitment. Some questions to ask when considering a mutual fund as an investment are as follows:

• Who is the manager of the mutual fund? What is the manager's experience? What is the manager's track record?
  
• How often does the mutual fund buy and/or sell securities? What are the tax implications of such transactions?
  
• What are the costs, if any, associated with management of the fund?
  
• Are there any investment opportunities that better suit my investment strategy?

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