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Mutual funds explained

Discover the world of mutual funds

An easy way to invest in stocks and/or bonds is through mutual funds, or professionally managed portfolios. Investors buy shares in a fund, and the mutual fund company pools that money to invest on their behalf. A share represents a portion of the fund's holdings.

FAQ about ETFs and mutual funds

Other videos in the series
Find other videos below for more information about mutual funds and ETFs.
Other videos in the series
Find other videos below for more information about mutual funds and ETFs.

What are the potential benefits of investing in mutual funds?

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
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Diversification
Because mutual funds can invest in many different stocks or bonds, they give investors an easy way to diversify their portfolio.
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Low cost
Mutual funds offer an affordable way to invest in a wide array of stocks without paying transaction fees for each stock held. With a mutual fund, the cost of trading is spr...
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Management
Experienced investment teams set the fund's strategies, research investments, make trades and monitor the fund's performance.

What are some risks associated with mutual funds?

There are a couple of potential risks associated with mutual funds:

  1. Potential for loss of principal
    Portfolio managers can't guarantee the performance of the fund, creating potential for loss of principal on the investment.
  2. The diluting effect of diversification
    At times, a fund's diversification can have a diluting effect on positive returns. For example, if one stock in the fund doubles its share price, that's not necessarily reflected in the fund's overall return.

What are some myths surrounding mutual fund investment?

There are two common misconceptions about mutual funds:

  1. Investors own the fund’s underlying investments
    The biggest misunderstanding regarding mutual fund investment is that investors own shares of the fund's holdings. That's not the case; investors own shares of the fund itself, rather than the fund's underlying investments.
  2. Mutual funds are only comprised of stocks
    Another common myth is that mutual funds are only comprised of stocks. In fact, mutual funds can invest in a variety of asset classes, including, but not limited to, fixed income, cash and non-traditional income vehicles, like alternatives.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.