At its most basic level, a mutual fund is a vehicle that holds other investments. A mutual fund pools money from many investors and purchases different securities on their behalf. Investors own a share of the mutual fund proportionate to their investments and share proportionately in the fund’s gains and losses. A mutual fund is managed by one or more professional money managers. The job of the fund manager is to manage the fund within the parameters of the fund's prospectus. These managers often work for a large company such as Fidelity or Vanguard. The fund company’s job is to monitor the fund’s performance and be accountable to the investors.
Mutual funds are generally classified by their investing styles. Just as there are many types of stocks and bonds, there are many investing styles that the fund manager use in investing the money of their investors. The broad categorization of mutual funds include:
In Chapter 3, we describe mutual funds in much more detail.