What Are Mutual Funds?

A mutual fund is a financial product that combines the money of many individuals like you. The company that operates the fund collects the money and keeps track of how much each person puts into the pot. Professional investors called fund managers determine what to buy with the money to deliver the best returns they can find, depending on the type of mutual fund. Some funds concentrate on various types of stock, while others hold bonds (more on those in a moment). Because most mutual funds bring together tens or even hundreds of millions of dollars, fund managers have the money to spread out among many investments such as different stocks, for example. This is an advantage because it means that as an investor in the fund, you own a small slice of each of those stocks—possibly as little as a fraction of a share, but still some real amount worth a certain amount of money. In other words, by dividing your savings into all of these small investments, mutual funds let you diversify and reduce the risk that you’ll lose big if one of those stocks melts down