Question ~ What Is a Mutual Fund, in Simple Terms?
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Answer: What is a mutual fund, in simple terms?
Mutual funds are investment companies. They sell shares to the public, and use that money to buy and hold investments like stocks, bonds or other securities. The fund manager determines which investments to buy for the fund, and keeps track of the value of the mutual fund. When you own shares in a mutual fund, you own part of a basket of securities. It's a general rule that the more stocks you own, the lower your financial risk if one company fails. By owning shares in a mutual fund, you diversify your investment and reduce your risk.
An index mutual fund is also called an Index Fund. The Index Fund owns the stocks that are included in a stock index, like the Dow Jones Industrial Stock Index or the Standard & Poor 500 Stock Index. The Index Fund will perform very much like the Index it mirrors. An index fund does not need a manager to choose the stocks for the fund.
To compare two mutual funds, look at how much the fund earns each year. Do not compare mutual funds on the basis of the share prices, because prices depend on how many shares are outstanding. All mutual funds must report their average annual compounded rates of return for 1-year, 5-year and 10-year periods. This is called the average annual total return for the fund. Your business newspaper and Morningstar investment service will list the mutual funds for you.
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