What is a Mutual Fund?

You have many options when it comes to how you choose to invest your money. Having to make a choice from an array of options is often incredibly difficult—just think about when you’re handed a 10-page dinner menu! I wind up stuck at the table forever trying to decide. But making decisions about your money are always important ones, and you need to have a good understanding of all of your options.

What is a Mutual Fund?

If you’ve ever asked yourself, “What is a Mutual Fund?” you’ve come to the right place. As you may have assumed from its name, a Mutual Fund is one that many people have a stake in. The investment company sells shares in its mutual fund to investors, and then uses the money supplied by investors to invest in stocks, bonds, money-market instruments, other securities, or even cash. Investors can also purchase shares in a mutual fund through brokers, such as companies that manage 401K investment plans.

You cannot buy into a mutual fund through other fund investors or on secondary markets like the Nasdaq Stock Market or the New York Stock Exchange. When you buy shares in a mutual fund, you pay what’s called the approximate net asset value (NAV) per share, as well as any fees that may be charged. A common charge incurred when buying into a mutual fund is a sales charge, which is also called a “sales load.” Not all mutual funds charge a sales load when you buy into them.

Mutual fund shares are considered “redeemable,” which means that if you purchase shares in a mutual fund, you can sell them back to the fund at the current NAV per share. However, just as there are sometimes fees when buying into a mutual fund, there are also sometimes fees when selling your shares. These fees include deferred sales loads or redemption fees.

The entities that manage mutual funds’ investment portfolios are called “investment advisers,” and they are registered with the US Securities and Exchange Commission (SEC) to do so. The SEC also requires mutual funds to be registered themselves, and regulates all of them.

Mutual funds come in many shapes and sizes: index funds, stock funds, bond funds, and money market funds. There are different rules and intentions of each type. Additionally, their objectives and strategies will often differ, as well as their risks, fees, and volatility. Fees are a crucial factor when choosing mutual fund to invest in, because those fees may drastically reduce the return on your fund investments.

If you have any questions about mutual funds beyond our introduction, please call our offices at 516.746.6322, and one of our experienced Certified Public Accountants will be happy to help you!

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