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See also A Brief History of Mutual Funds
There are several subsets within each objective, such as large, mid or small-cap growth, which dictates the size of the companies in which the fund will invest in order to achieve its objective of growth. Income funds may be conservative, moderate or aggressive. There are also funds that invest in a specific type of security, such as junk bonds or preferred stocks. Other funds focus on a specific sector of the market, such as the energy or utility sectors, but may purchase more than one type of security issued by companies in that sector.
Every mutual fund is also considered a separate security by the SEC and must be individually registered with them by their issuers as such.
For example, a global large-cap growth fund may own stock in every single company in the Standard & Poor’s 500 Index plus large, established companies in several other countries around the globe to comprise total holdings of 1,000 stocks. Assuming that there are 50 million shares of the fund outstanding, each fund share represents ownership of 1/50 millionth of each stock in the portfolio.
The net effect of this is therefore that a completely uneducated, common-Joe investor can enjoy the same level of diversification as wealthy sophisticated investors who can create private portfolios requiring hundreds of thousands or even millions of dollars. They can also have their money managed by professional managers who may have 20 or more years of experience and carry credentials such as the Chartered Financial Analyst, a rigorous academic designation that takes at least 3 years to earn.
As mentioned previously, these managers will trade the securities in the fund to meet a specific objective, and they are paid and trained to make unbiased investment decisions based upon an established trading plan or strategy that is designed to meet that objective. They are not subject to the emotional bias that can creep into the decision making-process that plagues the majority of inexperienced investors who are making their own choices.
Be sure to also see the 7 Questions to Ask When Buying a Mutual Fund
If we build on the previous example and say that each share of the fund costs $5.50, then the shareholder can participate in ownership of 1,000 different securities for mere pennies compared to the commission cost that would be required to purchase even a single share of each of the stocks held by the fund, not even counting the cost of each share itself.
Of course, the exact cost that the shareholder pays will vary from one fund to another based upon the fund’s expense ratio and whether or not the fund assesses a sales charge upon either purchase or redemption (or both).
If you are holding a closed-end fund or Exchange-Traded Fund (ETF) that trade on the exchanges during market hours, then you can buy and sell them any time, although you will probably still have to wait for three business days (T+3) to get a check if you wish to actually withdraw the sale proceeds.
There are mutual funds available to help you achieve virtually any type of investment objective, including some that can even move inversely with the markets for sophisticated contrarian investors.
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