By: Julio Perez, Fall 2017 IAC Graduate Research Assistant
A mutual fund is an investment company that pools money from several investors and invests said money into diverse securities based on investment goals. It works similarly to an individual investment, except with a much larger pool of capital in exchange with limited control over said capital. A mutual fund is considered an open-end investment company, as opposed to a closed-end fund and a unit investment trust, concepts which we don’t have to worry about for now.
Investors must buy stock in the fund from a broker for the fund or the fund itself, and the fund does not sell its shares on secondary markets as would other public companies.
Aside from the larger amount of capital for investment, mutual funds also tend to employ portfolio managers to decide which securities are best to invest in. Any dividend or interest garnered on the mutual fund or capital gain made by the sale of the securities is passed on to its investors, after expenses are paid. The objective of a fund is usually explicitly expressed by the fund and informs the investor of how the fund will be investing his capital to achieve his goal. Said goals can range from value appreciation of stock bought by the fund, equity income funds which regularly pay dividends, and emerging market funds which focuses on investing in new upcoming companies worldwide, among others. These goals only include stock funds; bond funds focus more on investing in bonds instead of stocks, and some mutual funds focus specifically on investing in other mutual funds.
Of course, there are drawbacks to investing in mutual funds. The overhead costs are evident enough, and like any investment, mutual funds have risks.
Translated: “I think I will pool my money with like-minded investors and let a manager invest in a diversified fruit leather fund for me.”