What is a Mutual Fund

With a New Year comes many resolutions, including managing your money better. One thing you are going to do during your company’s open enrollment period is sign up for their 401k plan and start saving for your future. When the money is pulled and put into your investment account, you’ll notice that you will need to make some choices about diversifying your portfolio into some mutual funds, but you aren’t exactly sure what a mutual fund is.

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. Basically it is a hodge-podge assortment of many types of investments constructed into one investment fund.

Many investors choose to have mutual funds in their portfolios as they provide a cost-effective way to diversify their investment portfolios. Transactions costs for mutual funds are split among all the shareholders as opposed to an individual having to pay all the fees on their own. Additionally, mutual funds tend to be managed by a professional fund managers who contributes their expertise as part of the package. They usually flow with the waves of the stock market.

Since the first mutual fund of 1924 (Massachusetts Investors Trust) this sector has grown to have over $26 trillion dollars in invested assets. This type of investment nearly stalled after the crash of the stock market in 1929, but gradually picked up steam as the markets stabilized. The business really started to grow legs in the 1960’s and finally developed into the Goliath of investment strategies.

The Investment Company Act of 1940 created by the SEC helped provide mutual fund investments by giving it the backbone it needed to flourish. Still reeling from the Great Depression, investors were unsure of what to do with their money. To instill confidence, the act established guidelines and regulations that helped kick-start mutual funds (aka open-end funds), unit investment trusts (UITs), and closed-end funds.