A mutual fund is a type of professionally-managed collective
investment vehicle that pools money from many investors to purchase securities.
While there is no legal definition of mutual fund, the term is most commonly
applied only to those collective investment vehicles that are regulated,
available to the general public and open-ended in nature. Hedge funds are not
considered a type of mutual fund.
The term mutual fund is less widely used outside of the
United States. For collective investment vehicles outside of the United States,
see articles on specific types of funds including open-ended investment
companies, SICAVs, unitized insurance funds, unit trusts and Undertakings for
Collective Investment in Transferable Securities.
In the United States, mutual funds must be registered with
the Securities and Exchange Commission, overseen by a board of directors or
board of trustees and managed by a registered investment advisor. They are not
taxed on their income if they comply with certain requirements.
Mutual funds have both advantages and disadvantages compared
to direct investing in individual securities. They have a long history in the
United States. Today they play an important role in household finances.
There are 3 types of U.S. mutual funds: open-end, unit
investment trust, and closed-end. The most common type, the open-end mutual
fund, must be willing to buy back its shares from its investors at the end of
every business day. Exchange-traded funds are open-end funds or unit investment
trusts that trade on an exchange. Open-end funds are most common, but
exchange-traded funds have been gaining in popularity.
Mutual funds are classified by their principal investments.
The four largest categories of funds are money market funds, bond or fixed
income funds, stock or equity funds and hybrid funds. Funds may also be
categorized as index or actively-managed.
Investors in a mutual fund pay the fund’s expenses. There is
controversy about the level of these expenses. A single mutual fund may give
investors a choice of different combinations of expenses by offering several
different types of share classes.
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