Mutual Funds

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What investment offers diversification, flexibility and liquidity? You’ve done the research and you know the answer—a mutual fund. But have you ever wondered how the industry began, exactly what a mutual fund is, and what types of funds are available?

Well wonder no more! Here are some fund facts:

The history. The concept of investing pooled money arose several centuries ago. But, according to one source, the idea only arrived in the U.S. in 1893. Thirty-one years later, the first mutual fund—in the form Americans are familiar with today—was founded with assets of $50,000. Several decades of slow growth followed. Then Congress created a form of retirement savings called Individual Retirement Accounts (IRAs) and mutual funds began expanding. Today, thousands of funds hold trillions of dollars.

The definition. In investment lingo, a mutual fund is a company with fixed capitalization freely buying and selling its own shares and using its capital to invest in other companies. Put more simply, a mutual fund is a special type of corporation that sets up an investment pool with a specific investment objective in mind, and finds individuals who will buy shares. Those individuals indirectly own the assets in the fund’s portfolio, and the fund must distribute its earnings (typically in the form of dividends and capital gains) to them.

The choices. Today’s mutual funds come in many flavors. Here’s a sampling.

  • Large cap funds invest in companies with high market capitalization. There are also mid-cap and small cap funds.
  • Index funds try to duplicate the performance of specific market indexes.
  • Sector funds invest in narrow slices of the overall market.
  • International funds include non-U.S. assets.
  • Growth funds seek stocks with potential for future gains.
  • Income funds choose a portfolio that provides a current inflow.
  • Balanced funds combine both objectives.
  • Funds of funds invest in other mutual funds.

Of course, there’s plenty more you’ll need to research before you invest in a mutual fund. But the more you learn about your investments, the better your decisions will be.

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