Mutual Funds Definition, Functions and Objectives

Learn about the the mutual funds definition, as well as the functions and goals of this popular financial tool many people invest in.

What are Mutual Funds Definition

Initially, this was invented just another investment vehicle to achieve a diversified portfolio. However, it has gained much popularity amongst many investors with the passage of time. Millions of people are investing in mutual funds today. In the United States alone, people are investing trillions of dollars in mutual funds. A mutual fund can be described as a pool of money collected by multiple investors and invested into various instruments. Over the last 20 years, mutual funds have become extremely popular as you will see from the functions and objectives below.

These investment products may include bonds, stocks, income funds, equity funds, and other types of securities. The investors in this fund are ordinary individuals looking to save and earn profits as well. They choose to use the shares rather than savings account. There are a lot of people that individually invest in stocks and bonds, but they are doing so through a mutual funds. The management unit of a mutual fund is in charge of that job.

Investors in this popular financial tool are given complete power to sell off their fund shares at any time.

Fund Functions

Think of mutual funds like buying a smaller piece of a larger pizza. Each investor gets a proportionate share of the returns. They also share in expenses, gains, and losses on their purchased units. A qualified team of professionals manages the investors funds aggressively. They build the investment portfolio to do so.

A professional asset management team is responsible for choosing where the mutual funds unit holders money is invested, and monitoring it. They are paid a fee for their services. They also collect sales fees when selling funds. An investor in a mutual fund is only an owner of units purchased, with no rights to the individual securities, like bonds. The risk factor is lower in a mutual fund because investments are diversified, creating a portfolio of investments across a wide range of securities.

Investment Funds Objectives

If the investment objectives of the mutual funds are equities or growth, you would realize the firm would only invest in stocks. If, however, debt or revenue is the objective, then they invest in fixed-income securities only. The firm will invest in short-term market instruments including government securities if its objective is the money markets. If its objective is equilibrium, we might say that it will invest partially in equity and partially in fixed-income securities. This will keep a balance risk tolerance of risk versus return.

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