What Is a Mutual Fund? | Capital Group

Mutual Fund Basics

What Is a Mutual Fund?

A mutual fund provides investors access to professional management and broad diversification.

A mutual fund pools the money of people who have a similar investment objective, such as long-term growth or income. When you buy shares in a mutual fund, you and the other investors participate in the gains and losses of the fund’s investments.

How Is a Mutual Fund Managed?

The fund’s investment advisor manages the fund and invests in securities that are designed to meet the fund’s investment objective. Depending on the fund’s goals, these securities may include:

  • Stocks — Shares of a company sold to fund business growth. When you buy a stock, you own a part of the company. Historically, stocks have shown the potential to grow in value over time. Stocks also have potential to lose value.
  • Bonds — A loan agreement between the issuer — typically a company or government entity — and the buyer. If you buy a bond, the issuer usually agrees to pay you interest for a certain length of time and to return your principal. Bonds tend to be more stable than stocks, but they are not without risk and can also lose value.
  • Cash equivalents or money market securities — Investments such as short-term debt instruments, certificates of deposit and U.S. Treasury bills. Money market investments have relatively low risk, but the value of cash can be eroded by inflation.

At the inception of a mutual fund, the investment advisor purchases a variety of securities that meet the fund’s objective. All of the fund’s investors then own a proportionate share of each security based upon the size of their investment. When mutual fund investors are ready to sell their shares, the fund is required to pay an amount equal to the fund’s net asset value for each share redeemed subject to the terms of the prospectus. Net asset value, or NAV, refers to a mutual fund’s price per share. The NAV typically is computed once a day based on the closing market prices of the securities in the fund’s portfolio. 

A mutual fund can gain value when the securities it owns pay interest or dividends or when the securities themselves rise in value, but a fund can also lose value.

What Are the Benefits of Mutual Funds?

The advantages of mutual funds include:

  • Professional management — Managing investments requires a commitment of time, resources, experience and knowledge that most individuals don’t have. Actively managed mutual funds have investment advisors, which typically include professionals such as portfolio managers and investment analysts who do research on investors’ behalf. These professionals study companies full time by reading reports, reviewing balance sheets and meeting with the company’s management.
  • Diversification — When you buy shares in a mutual fund, your money is invested in dozens or even hundreds of securities covering different industries that meet the fund’s objective. It would typically be difficult for an individual to own a portfolio that matches the diversification you’d find in a mutual fund. Owning a diverse mix of securities doesn’t eliminate risk, but it can reduce it because the ups and downs of individual securities may offset each other.
  • Convenience — Investors can sell their shares on any business day that the fund values its portfolio. This feature becomes important when you begin to withdraw your money in retirement.

Finding the Right Mix of Mutual Funds

Most financial professionals suggest that investors diversify their portfolios by investing across several types of investments. Which mix is right for you? That depends on a number of things — including your investment time horizon, risk tolerance and financial circumstances. American Funds offers funds with an array of investment objectives to help you and your financial professional build a portfolio tailored to your needs.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.