Definition of Mutual Funds

The definition of mutual funds: An open ended fund that is operated by an investment company. This company raises money from shareholders and then invests in various investment vehicles. Mutual funds raise money by selling shares of the fund to public investors (like yourself). A mutual fund will take the money they received and invest it in stocks, bonds and/or money market instruments.

OK, that mutual fund definition may have left you more confused then when you started. Here is a simpler definition. A mutual fund takes money from a large groups of individual investors, pools it together and then buys investments. Everyone who invested money then shares in any profits or losses of the fund in proportionate to the amount they invested and when they invested.

You may have noticed that in the first definition of mutual funds it stated "a open ended fund." This simply means that there is no limit to the number of shares that can be issued. Current or new investors can invest as much money as they want and the fund will simply issue new shares to them.

Conversely, a “closed ended” fund is similar to stock. Closed ended mutual funds issues a predetermined amount of shares in a initial public offering (IPO). After the IPO the shares then trade on a stock exchange. Closed ended funds are do not have to issue more shares like a open ended fund does.

Why do people invest in mutual funds? Mutual funds give investors the benefits of professional money management, diversification, convenience, liquidity and choice. This is what makes mutual funds so popular and attractive. These features are very hard to achieve by investing on your own. 

It is reported that around 90% of all investors own mutual funds in their portfolio. If you invest in a 401(k) at your job, it is very likely that you are investing in mutual funds. All in all, mutual funds are where most beginners as well as advanced investors should invest most of their money. They are fairly easy to understand and take most of the guess work out of investing, much as managed funds where traders trade for you.