Investing Mutual Funds: The Basicsby James Mazzola
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A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of the term "mutual fund", the term is most commonly applied only to those collective investment vehicles (i.e. investment companies) that are regulated and available to the general public for purchase. More often than not, a 'fund' is open-ended in nature, meaning investors can buy or sell shares from/to the fund. A closed-end fund is one where the shares once sold by the fund to the public, trade on exchanges among investors, something like regular stocks do. Hedge funds are loosely considered a type of mutual fund.
The term mutual fund is less widely used outside of the United States and Canada. For collective investment vehicles outside of the United States, see articles on specific types of funds including open-ended investment companies, SICAVs, unitized insurance funds, unit trusts and Undertakings for Collective Investment in Transferable Securities ("UCITS").
In the United States, mutual funds most often are registered with the Securities and Exchange Commission, overseen by a board of directors (or trustees if organized as a trust rather than a corporation or partnership) and managed by a registered investment advisor. Mutual funds are not taxed on their income and profits if they comply with certain strict requirements under the U.S. Internal Revenue Code.
Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. They have a long history in the United States. Today they play an important role in household finances and retirement planning.
U.S. registered mutual funds can be characterized generally in 1 of 3 ways: open-end, unit investment trust, and closed-end. The most common type, the open-end fund, holds itself out to investors it will buy back shares from investors wanting to sell them back to the fund on any regular business day at the price next determined (usually once at the end of the day). Exchange-traded funds (or "ETFs" for short) are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity. Closed end funds were described earlier.
Mutual funds are often classified by their principal investments relative to their investment objective. The four largest categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds may also be categorized as index or actively managed.
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