Investing and Saving
A mutual fund is an investment vehicle that pools the money of many investors with a common objective. The pooled funds are invested in a mix of underlying securities, which may include stocks, bonds, and cash among other asset classes. Mutual funds are managed by professional asset managers based on the defined investment objectives of the particular fund. These objectives dictate the types of investments held within the fund as well as the strategy the fund manager may employ.
At a glance
- A mutual fund is a type of pooled investment vehicle that consists of a portfolio of investments like stocks and bonds.
Mutual funds provide investors with a simple and accessible way to enjoy the benefits of diversification and professional management. - Mutual funds can take on a variety of broad categories based on their investment strategies, underlying assets, and objectives.
- The market value of a mutual fund does not fluctuate throughout the day but is instead determined at the end of the day when stock markets close.
- Mutual funds have costs associated with them including management expense ratios (MERs) as well as the potential for other sales commissions, which directly impact an investor’s returns.
- A mutual fund can generate various sources of return (such as interest and dividends), which are passed on to investors as distributions.
- Various risks are associated with mutual funds depending on the underlying investments and strategies.
Benefits of mutual funds
Investing in mutual funds has two primary benefits:
Diversification
Typically, mutual funds hold many different types of investments to offer diversification—particularly for funds that hold a mix of different asset classes. Investors can access mutual funds and get exposure to the many investments within for a very modest amount of money.
Professional management
Mutual funds are managed by professional fund managers responsible for making investment decisions that benefit the fund and the investors. These professionals take on the responsibility of researching the investments that go into the portfolio as well as day-to-day management of the portfolio so that an investor does not have to worry about it.
Mutual fund categories
Mutual funds can take on many different investment strategies but generally fall into several broad categories.
These funds invest mainly in short-term fixed-income investments that are generally considered cash-equivalents such as treasury bills. True money market funds are far less popular today with high interest savings account (HISA) products being more prevalent.
Bond funds, as they are frequently referred to, primarily invest in fixed-income instruments such as government or corporate bonds, and aim to generate returns largely by collecting interest income. For more information, please refer to our guide to bonds.
This category invests primarily in stocks or equities that represent ownership in companies. Stocks can generate returns from dividends, and have the potential for capital appreciation. Stocks can also be categorized based on factors such as geography and company size. For more information, please refer to our guide to stocks.
Growth investments can also include real estate investment trusts (REITs) that trade like stocks, and provide exposure to different types of real estate properties.
These funds invest in a variety of different asset types such as equities and fixed income to attain a target asset mix or a target risk profile. These funds are often composed of underlying mutual funds or exchange-traded funds (ETFs). In such cases, they may be defined as a fund of funds.
Equities or fixed-income investments are selected in order to closely track the performance of a specific index such as the S&P 500. These funds are passively managed, which means there isn’t a portfolio manager involved to make investment decisions and carry out the fund’s strategy.
Broadly speaking, such funds provide more narrow exposure to particular economic sectors of the stock market such as the technology or energy sector.
These funds invest beyond traditional asset classes such as equity and fixed income, instead exploring commodities such as precious metals, as one example. This category may also use alternative investment strategies that include the use of leverage, short selling, and derivatives.
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