Q:

How do mutual funds work?

A:

Quick Answer

Mutual funds work by combining the money of many investors into a single, professionally managed investment. The resulting pool of money can be invested in a wide variety of investments, including stocks, bonds or even other mutual funds.

Continue Reading
How do mutual funds work?
Credit: Lee Edwards Caiaimage Getty Images

Full Answer

When an investor purchases a share of a mutual fund, she immediately gains a measure of diversification in her investment holdings. This is true because instead of purchasing a single stock, for instance, she is buying a portion of a fund that may own hundreds of different stocks. When one stock in the portfolio performs poorly, other well-performing stocks can offset that disadvantage. Since mutual funds can own many types of asset classes, a single investment has the potential to provide all the diversification that an investor needs. While building a diversified portfolio of individual stocks and bonds requires a large outlay of capital, mutual funds are accessible to just about everyone, because they can be purchased with small dollar amounts. Most people have a need to invest, but they may not have the expertise to invest wisely. A mutual fund often places investment decisions in the hands of a professional money manager. With the goal of increasing value and managing risk, the fund manager decides what investments to buy and sell.

Learn more about Investing

Related Questions

  • Q:

    How does a hedge fund work?

    A:

    Hedge funds are a type of investment partnership in which the investor contributes money and the general partner manages the funds, according to Forbes. Hedge funds are intended to optimize the investor's return, while reducing overall risk. There can be multiple investors for a single hedge fund.

    Full Answer >
    Filed Under:
  • Q:

    What are some helpful tips for first-time investors?

    A:

    First-time investors should begin small and diversify their investment, according to Investopedia. They should not invest more than they are willing to lose if the investment turns bad. An investor should gain experience and confidence before making larger investments.

    Full Answer >
    Filed Under:
  • Q:

    Is owning gold a good investment?

    A:

    While many factors determine if an investment is good or bad, gold, silver and other precious metals are too volatile for most investors, particularly retirees, according to AARP. It is an emotional form of money, but it does not produce anything.

    Full Answer >
    Filed Under:
  • Q:

    What services does TD Ameritrade offer for investors?

    A:

    TD Ameritrade offers a variety of services for investors, including online trading platforms, investment calculators and a wide range of investment products, according to the company website. Investment products include annuities, stocks, options and mutual funds.

    Full Answer >
    Filed Under:

Explore