Mutual funds are managed portfolios of stocks and bonds, where the portfolio manager uses pooled investor funds to manage the portfolio.
In the U.S., the first mutual fund was created in 1924 when three investors in Boston pooled their money and formed the Massachusetts Investors’ Trust. The essence behind Mutual Funds today is the same – a pool of money is collected from a number of investors and then professionally managed.
The investors are distributed the gains or losses of a portfolio purchased with their capital. The fund might consist of individual stocks, bonds, and even other mutual funds. A mutual fund is technically a company whose only assets are the securities it holds, and investors who purchase shares of the mutual fund will participate in the gains and losses of the entire portfolio held by the mutual fund.
Gains and losses in a mutual fund portfolio must be passed on to the individual investors every year, since the mutual fund is a pass-through entity. Mutual Funds are often attractive because they provide more diversification than most investors are able to get on their own.
Most investors simply cannot purchase shares of 1,000 different stocks, especially if it is meant to gain exposure to a certain sector or asset class that takes expertise to navigate. Funds can accomplish this through active management or index investing that focuses on certain sectors, regions, and so on.
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