What Is a Mutual Fund and How Does It Work?

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What Is a Mutual Fund and How Does It Work?

A mutual fund is an investment company that raises money from investors to invest in stocks, bonds, and other securities. It is a portfolio made up of several individual investments. When those investments gain or lose value, you gain or lose as well. When they pay dividends, you get a share of them. Mutual funds also offer professional management and diversification. They do much of your investing work for you.

Investing in mutual funds involves risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.

Open-end and closed-end

Mutual funds may be open-end or closed-end funds. The term mutual funds is used most often to mean open-end funds. Open-end funds issue new shares continuously as investors buy them. Investors redeem their shares directly to the fund, which in turn must buy them back.

Closed-end funds issue a fixed number of shares that the funds may redeem only upon termination of their trusts. Shareholders in a closed-end fund may, however, sell their shares through a broker on the secondary market to other investors, but not back to the fund. Closed-end funds are commonly referred to as exchange-traded funds (ETFs).