The basics of mutual fund investing: what they are and how they work

A mutual fund is a type of investment vehicle that pools money from many investors to purchase securities, typically stocks, bonds, or a combination of the two. The value of an investor's share in the mutual fund, known as the net asset value (NAV), is determined by the fund's total assets minus its liabilities, divided by the number of shares outstanding. Mutual funds are managed by professional fund managers, who use the pooled money to buy a diversified portfolio of securities to achieve the fund's investment objective. Mutual funds can be bought and sold on a daily basis, and the price of the shares is based on the fund's NAV at the end of each trading day. Mutual funds offer investors the ability to diversify their portfolios and gain exposure to a variety of securities with a small investment, but they also come with management fees and other expenses.

Another key aspect of mutual funds is that they are typically classified based on their investment objective or strategy. For example, a stock mutual fund will invest primarily in stocks, while a bond mutual fund will invest primarily in bonds. There are also funds that focus on specific sectors such as technology or healthcare, and others that follow a particular investment style such as value or growth.

Additionally, mutual funds can be either actively managed or passively managed. Actively managed funds have a team of portfolio managers who make decisions on what securities to buy and sell, while passively managed funds, also known as index funds, simply aim to replicate the performance of a benchmark index, such as the S&P 500. Index funds typically have lower expense ratios compared to actively managed funds.

When you invest in a mutual fund, you own shares representing a portion of the fund's assets. The value of your shares will increase or decrease based on the performance of the securities in the fund's portfolio. Dividends and interest earned by the securities are also distributed to shareholders on a regular basis.

Overall, mutual funds can be a convenient and cost-effective way for individuals to invest in a diversified portfolio, but it's important to understand the investment objective, risk, and expenses associated with a particular fund before investing.