What Are Mutual Funds?

What Are Mutual Funds?

As a popular investment option, you have probably already heard plenty about mutual funds. Chances are you own mutual funds in your retirement plan or brokerage account. In fact, according to the Investment Company Institute, more than 92 million individuals in the U.S. (about 45% of U.S. households) owned mutual funds in 2008. But do you know what mutuals fund are and why so many people own them?

Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the fund’s assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund’s prospectus.

Fees of Mutual Funds

All mutual funds charge fees to operate and manage the fund. Management fees pay the fund companies (or managers) to manage the funds. Some funds also charge investors an upfront sales charge/load when he/she first purchases shares in the fund, while other funds charge a back-end load (contingent deferred sales charge) upon sale of fund shares. There are also funds that have no sales charge and these are known as “no-load funds.” 12b-1 fees are imposed by some funds to cover marketing and distribution costs. There are also various share classes of funds that differ in fee structure according to class (Class A, Class B, Class C, etc.)
Structure of Mutual Funds

Technically, mutual funds are “open-end” funds -- one of four basic types of an investment company. Closed-end funds, exchange-traded funds and unit investment trusts are three other types. As investment companies, mutual funds are regulated under the Investment Company Act of 1940.
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