TeenBusiness.com > Teenvestors > Mutual Funds > A Detailed Definition


A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other financial assets (or securities, as they are collectively known). The combined holdings of stocks, bonds, or other assets the fund owns are known as its portfolio. Each investor owns shares, which represent a portion of these holdings. In the example of your investment of $2,000 in the stocks of companies in four industries, each investor owned 1/4th of the investment.

There are many different types of funds. There are funds that invest in technology, foreign, small-cap or any other variety of stocks you can think of. What all funds have in common is that they all need portfolio managers. These managers are responsible for buying stocks and other securities for mutual funds. They are also responsible for selling and substituting securities in the fund as well. Professional management of mutual funds is the main reason a lot of investors buy mutual funds in the first place. These investors feel that they themselves just don't have the time or the skill to determine which stocks to buy on their own.

A fund can own as few as 20 different stocks or as many as 500 different stocks. There is no limit to the market value of the stocks in mutual funds. At the time of this writing, the biggest mutual fund had assets worth nearly $100 billion. This number changes depending on what is happening in the economy. More people put money in mutual funds during a bull market and move their investments to safer investments when the economy is doing poorly.

Mutual funds usually publish the amount of money they make for investors each year in order to attract more investors. The amount they make for the investors is called the fund's annualized total return. Funds often publish their 1-year, 3-year, 5-year, and 10-year annualized total return to boast about how much they have increased investors' money. This figure is usually given in percentage terms. For example, one of the biggest mutual funds in the world, the Vanguard 500 Index, with nearly $96 billion in assets at the end of 1999 said it had the following annualized returns for 1, 3 and 5 years: 21.9%, 27.8% and 28.7%. What this means is that in 1999, it had a return of 21.9%. In 1997, 1998, and 1999, it had an average return of 27.8% for each of those three years. In 1995, 1996, 1997, 1998 and 1999, it had an average return of 28.7% for each of those five years. Even though most funds only publish average returns, the actual returns each year are probably the best way to see how much the fund's returns move up or down.

Advertisements, rankings, and ratings tell you how well a fund has performed in the past. The more you study mutual funds, however, the more you will realize that a fund's past performance is not as important as you might think. Studies show that future returns can be quite different from historical returns. This year's "number one" fund can easily become next year's below-average fund.