Identification

• Mutual funds are pools of money made up of contributions from individuals and managed by an investment company. The participants' investments in the fund may be used to purchase interest in a variety of financial instruments. The fund may be actively managed, i.e., the holdings consistently changed or passively managed, as when a diversified portfolio of investments is purchased and left to grow over time.
  
  

Benefits

• Investing in mutual funds allows the small investor to benefit from enormous increases in buying power by combining funds from thousands or tens of thousands of individuals. More buying power can permit diversification, which allows the individual to spread the risk of investing over broad areas of the market, abiding by the old adage of not putting all the eggs in one basket. Mutual funds offer investors an opportunity to own shares in a variety of companies, profit from corporate bonds and government securities, and otherwise own securities which may not be affordable if investing alone.
  
  

Types

• Just as there are a variety of types of securities, mutual funds come in a variety of packages.
  
  Bonds, which are fixed-income securities, provide the investor with a clearer picture of what to expect in the way of earnings going forward. Stock prices can be volatile at times. Many mutual funds purchase stocks and bonds, as well as other types of securities, such as Treasury bills, to spread the risk. Additionally, many mutual funds hold a small portion of the fund's portfolio in liquid cash assets.
  
  

Considerations

• Since the passage of the Federal Securities Act of 1933, companies wishing to offer securities for sale to the public, as well as investment companies trading in securities, have been required to follow a policy of full disclosure. Parts of the regulations require that a prospectus, a financial statement, be made available to all potential investors. Among the details a mutual fund prospectus will provide include the names and resumes of the manager(s) of the fund, the objectives of the fund, past earnings, as well as an itemized description of the holdings of the fund.
  
  

Warning

• Mutual funds in the United States are regulated by the Securities and Exchange Commission (SEC), the regulatory watchdog agency of the federal government whose job includes protecting investors. However, the SEC has no control over day-to-day market conditions. Thus, regardless of the type of mutual funds or securities the investor chooses, risk is ever-present.