A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. There are myriad kinds of mutual funds, each with its own goals and methodologies. Whether or not a mutual fund is a good investment is a matter of much public debate, with many claiming they are excellent for the average person, and others saying they are simply a poor way to invest.
A mutual fund may be either an actively managed fund or an indexed mutual fund. Actively managed funds are changed on a regular basis by a fund manager in the attempt to maximize their profitability. The fund manager looks at the market and the sectors a fund invests in and redistributes the fund accordingly. An indexed fund simply takes one of the major indexes and buys according to that index. Indexed funds change much less frequently than actively managed funds, but in theory an active fund has more potential for profit.
Many critics of mutual funds point out that scarcely over 20% of mutual funds outperform the Standard and Poor's 500 Index. This means that nearly 80% of the time, an investor would have been more profitable by simply buying equal shares in all 500 of the companies currently on the S&P 500.
Supporters point out that for most people the complications involved in traditional investment are simply not worth the effort. A mutual fund offers an easy way to invest in something with a higher return than, say, interest earned at the bank, while keeping funds somewhat fluid. It also eliminates the need to track the market oneself.
There are more types of mutual fund available than there are publicly traded stocks, making the process of choosing one a somewhat daunting prospect for most people. In general, it is good to look at a few types of mutual fund that catch your eye and investigate them to see if they fit your needs. The length of time you want to remain invested, associated costs, tax status, and whether a fund is closed- or open-ended may all prove important.
The sector of investment for a mutual fund may also be something you want to look at. Many sector funds exist, and they are most often the top-performing mutual funds in a given year. The problem, of course, is guessing which sector will next see uniform growth, and avoiding sectors that can be hard-hit by single events, such as transportation.
Many people may also want to consider mutual funds which have specific social agendas, in addition to making a profit. A number of environmentally-friendly mutual funds exist which only invest in companies that meet certain best-practices criteria. Mutual funds based on other social views, political slants, and religious inclinations also exist.
Whichever mutual fund you ultimately wind up using, it is important to stay diversified. Having some money in long-term funds and stocks, with some in money-market funds and bonds, is always a smart way to plan for the future and any bumps that may occur in the market.