What are mutual funds?
When you have money to invest, you have many choices to consider. Perhaps too many. A mutual fund offers an investment in many things at once. A mutual fund is a collective investment vehicle that pools money from many investors to purchase securities. Each mutual fund share represents a fractional interest in every asset owned by the fund.
Mutual funds and exchange traded funds have become an essential asset in a great many individual investment portfolios. According to data from the Investment Company Institute’s 2018 Fact Book, at the close of 2017 assets in U.S. mutual funds and ETFs exceeded $22.1 trillion.
Who owns mutual funds?
The Investment Company Institute further reports that 100 million individuals own mutual funds, representing 44.5% of all U.S. households. Ownership is spread across all age and income levels, with median household income of $100,000. As people age, they tend to own more mutual funds, until retirement, when ownership begins to decline.
People typically are introduced to mutual fund investing through their participation in an employer’s qualified retirement plan. In fact, two-thirds of those who own mutual funds do so wholly or in part through retirement plans, and just one-third are owners outside such plans.
Mutual Fund Basics
A mutual fund offers several benefits compared to owning stocks and bonds directly.
Diversification. The best tool for managing investment risk is diversification. An individual might need to have several hundred thousand dollars to purchase enough different stocks and bonds to achieve a diversified portfolio. A mutual fund, on the other hand, provides instant diversification with far lower amounts invested.
Liquidity. Mutual fund shares may be bought or sold on a daily basis, giving investors ready access to their assets. Access. Information on mutual funds is readily available from newspapers and national magazines. Mutual funds may be able to participate in investments that are typically not available to individual investors.
Regulatory oversight. Mutual funds must be registered with the Securities and Exchange Commission (SEC) and are regulated under the Investment Company Act of 1940. Professional investment management. Professional portfolio managers supervise the investments held by the fund.
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