Popular in England more than 100 years ago, the first mutual funds began operating in the United States in the 1920s. A fund essentially represents a pool of investors who combine their money and collectively hire professional management to make investment decisions. Legally, it is a corporation, or trust, whose sole purpose is the investment of its shareholders’ assets. Investments are spread over a variety of securities (equity, fixed-income, or a combination of the two) and are managed in pursuit of specific, predetermined investment objectives. Unlike a stock, which has a fixed number of shares, most mutual funds stand ready to issue and redeem shares continuously. This feature gives the fund “open end” status.
Mutual funds began to achieve great popularity in the United States after World War II, and are now the investment vehicle of choice for a majority of IRA/401(K) retirement accounts. An estimated 88.5 million individuals own mutual funds in 2009.
There are several basic types of mutual funds: stock funds, owning shares of common stocks; bond funds, owning corporate bonds, tax-free municipal bonds, government bonds; index funds, investing in a portfolio that mimics an index, such as the S&P 500; and mixed asset funds, owning both stocks and bonds.