What are Mutual Funds?

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Mutual funds allow investors to build a diversified portfolio spanning many investments rather than putting money into a limited number of investments. Mutual funds can reduce risk and increase returns.
Mutual funds pool money from many investors, which a professional money manager manages who initiates and oversees the investments on behalf of investors.
There many kinds of mutual funds. This allows for flexibility. Some combine stocks and bonds. Others invest in indexes, sectors, regions, countries, different types of stocks, and exclusively in bonds.
Each mutual fund has a prospectus which is the laws of that mutual fund. A prospectus must be read and understood before investing.
Mutual funds have advantages and disadvantages. Benefits include wealth creation, a hands-off investing approach, dividend and interest reinvestment, convenience, low minimum requirements, and easy access to information.
Values are reported as the Net Asset Value or NAV.
Disadvantages of mutual funds include fees, management abuses, tax inefficiency, poor trade execution, slower timing, and unfavorable market conditions.
There is a debate concerning actively managed mutual funds vs. passive mutual funds in which opinions can run high. Active fund managers try to beat the market (S&P 500 or SPX). Passive investments have more investment flows and greater consistent historical returns. Active investing tends to become more popular during market declines.
There are advantages and disadvantages when comparing passive investing and active investing:
Passive investing advantages include lower fees, transparency, and greater tax efficiency.
Passive investing disadvantages include limitations on alternatives and lower returns than desired.
Active investing advantages include flexibility, hedging, and tax management.
Active investing disadvantages include higher fees and possibly more significant risk.
There has been a change in alternatives since the late 1990s. A new trading and investing vehicle, called Exchange Traded Funds (ETFs), have become very popular. Many believe ETFs may lead to the demise of mutual funds.