What is a mutual fund?

What is a mutual fund?

A mutual fund is a collection or pool of assets professionally managed for its shareholders. A fundњs total value divided by the number of shares outstanding gives the "net asset value (NAV)" of the fund.
When you invest in a mutual fund, your money is added to its pool and you are issued new shares at the NAV price. The total fund assets and the total fund shares increase in the same proportion; the net asset value per share is unchanged. When you sell your shares, you receive the current NAV per share. If it has risen, you make money.
Mutual funds exist to make investing easier. Funds point out that one check buys diversity and professional management. Diversity is good, to a point. Studies have shown that the benefit (decreased risk) of owning more than one stock, bond, or commodity rises sharply as the number increases to five or six and then less sharply until, after twenty, there is little additional gain. Most funds have many more than twenty holdings. The professional management is expensive and usually mediocre. The majority of funds, after paying management and trading expenses, do worse than the market as a whole.
There are thousands of mutual funds, specializing in every segment of the market. If you want to invest in the biotech industry and donњt have the time to learn about individual corporations, you can buy shares in a fund that invests only in biotechs. If you are convinced of the prospects for India, you have a choice of funds that invest only in Indian securities (stocks and bonds).
If you wish to invest some fraction of your money in stocks, but you arenњt interested in learning about various corporations, you can buy what is called an "index fundћ that holds every stock in an index and automatically mirrors that index, the Standard & Poors (S&P) 500, for example, or the Dow Jones. If you buy the same dollar amount of this fund every month or year, the cost over time will (by definition) be average; you avoid the possibility of buying only when the market is overpriced. This technique, "dollar averaging," is reasonable for a passive investor. Index funds have lower operating costs than other funds, and the quality of management is taken out of the picture.
Some mutual fund investors monitor a large number of funds on a daily or weekly basis and switch from top performer to top performer using various switch triggers. This can be a profitable strategy, but it requires constant monitoring. The rules change for how often different funds allow in and out trading, how expensive it is to switch, etc.
The best use of mutual funds is for those situationsа (another country) which are not practical for you to invest in directly.