Mutual fund

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. While there is no legal definition of the term "mutual fund", it is most commonly applied to collective investment vehicles that are regulated and sold to the general public on a daily basis. They are sometimes referred to as "investment companies" or "registered investment companies". Hedge funds are not mutual funds; they cannot be sold to the general public and are subject to different government regulations.

Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. They are generally the most common investment vehicle for retirement plans, such as the 401(k) in the United States.

There are three structures of mutual funds: open-end funds, unit investment trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange such as the New York Stock Exchange. Open-end funds that cannot be sold on an exchange can instead be sold back to the fund manager at the close of each business day.

Mutual funds are generally classified by their principal investment strategy: money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds. Funds may also be categorized as index funds, which are passively managed funds that match the performance of an index or actively managed funds, that try to beat other indexes but charge higher fees.

Investors in a mutual fund must pay mutual fund fees and expenses, which reduce the fund's returns and performance and are usually expressed in the form of an expense ratio. Passively managed funds, such as index funds generally have a lower expense ratio than actively managed funds.

Mutual funds may invest in many kinds of securities. The types of securities that a particular fund may invest in are set forth in the fund's prospectus, a legal document which describes the fund's investment objective, investment approach and permitted investments. The investment objective describes the type of income that the fund seeks. For example, a capital appreciation fund generally looks to earn most of its returns from increases in the prices of the securities it holds, rather than from dividend or interest income. The investment approach describes the criteria that the fund manager uses to select investments for the fund.

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