Mutual Fund

As a means for collective investments, mutual funds use a pool of money from a large number of investors for the purchase of stocks, bonds, and short-term money market instruments. Mutual funds offer all the benefits of professional investment management with the added caveat of portfolio diversification, which reduces investment volatility.

Each mutual fund has a manager who trades the fund's securities, realizing capital gains and losses and collecting dividends and interest income. Mutual funds normally have a specific investing goal, for instance "aggressive growth." Investors own shares of the fund with the net asset value of a share being calculated daily based on the fund's total value divided by the number of shares purchased.

Types of mutual funds include: exchange-traded, equity, capitalization, growth, value, index, active management, bond, money market, or hedge. In April 2006 the Investment Company Institute reported 8,606 mutual funds in operation with combined total assets of more than $9.2 trillion.

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