{"id":506,"date":"2023-12-19T19:57:56","date_gmt":"2023-12-19T19:57:56","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/accinvestments\/?post_type=chapter&#038;p=506"},"modified":"2023-12-19T19:57:57","modified_gmt":"2023-12-19T19:57:57","slug":"2-1-introduction-to-mutual-funds","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/accinvestments\/chapter\/2-1-introduction-to-mutual-funds\/","title":{"raw":"2.1: Introduction to Mutual Funds","rendered":"2.1: Introduction to Mutual Funds"},"content":{"raw":"<p class=\"lt-biz-79765\"><iframe id=\"iFrameResizer0\" title=\"Chapter 2 - Slides 01-20 - Introduction to Mutual Funds\" src=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.html\" width=\"640\" height=\"480\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><\/iframe><\/p>\r\n<p class=\"lt-biz-79765\"><a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.html\" href=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.html\" target=\"_blank\" rel=\"external noopener nofollow\">Video<\/a>\u00a0-\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.mp3\" href=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.mp3\" target=\"_blank\" rel=\"external noopener nofollow\">Audio<\/a>\u00a0-\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_YouTube_01_20.html\" href=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_YouTube_01_20.html\" target=\"_blank\" rel=\"external noopener nofollow\">YouTube<\/a><\/p>\r\n<p class=\"lt-biz-79765\">When teaching Introduction to Investments, one is confronted with the thorny problem of where to put mutual funds in the class. There are advantages to having mutual funds taught after stocks and bonds. Since almost all mutual funds rely on stocks and bonds as their underlying investments, it helps to have become acquainted with the ins and outs of\u00a0stock\u00a0and\u00a0bond\u00a0investments before tackling mutual funds. However, the advantages of teaching mutual funds before stocks and bonds are tempting. First, since investing in mutual funds is almost certainly to be in almost everyone\u2019s future via individual and employer-sponsored retirement plans, it pays to be introduced to them as soon as possible, especially since for whatever reasons, many students will drop the class within the first few weeks. Also, as we slog through the copious amount of concepts, definitions, attributes, calculations, etc. of stocks and bonds, inevitably several students will decide, \u201cYa\u2019 know, this stuff just ain\u2019t for me.\u201d That is fine! That is something we hope you will be able to decide for yourself as we progress through the semester. Not everyone will have the time, inclination, aptitude, and most importantly, receive enjoyment from doing the detailed research necessary to identify, choose, and continuously monitor individual\u00a0stock\u00a0and\u00a0bond\u00a0purchases. If you are one of those who decides that investing in individual stocks and bonds is not for you, no problem! That\u2019s why mutual funds exist! But whether you are an\u00a0Investment\u00a0Guru that relies upon mutual funds or one who chooses your own individual stocks and bonds, or both, it is important that you know and understand mutual funds thoroughly. Mutual funds are in your future. And remember that your friends, family members, and colleagues are counting on you. So let\u2019s get started!<\/p>\r\n\r\n<div id=\"section_1\" class=\"mt-section\">\r\n<h1 class=\"lt-biz-79765 editable\">What is a\u00a0Mutual Fund? An\u00a0Investment\u00a0Company!<\/h1>\r\n<p class=\"lt-biz-79765\">A\u00a0<u><\/u>mutual fund<u><\/u>\u00a0is an\u00a0<u><\/u>investment<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/i\/investmentcompany.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0company<\/u><\/a>\u00a0that invests its shareholders\u2019 money in a diversified portfolio of securities.\u00a0Investment\u00a0company is the legal term;\u00a0mutual fund\u00a0is the popular term. Mutual funds are one type of\u00a0investment\u00a0company; there are others. By far, though, the most popular\u00a0investment\u00a0companies are mutual funds. Although the term\u00a0mutual fund\u00a0does connote that investors are getting together to invest with one another, the term\u00a0investment\u00a0company more accurately describes the work of the\u00a0mutual fund. The\u00a0mutual fund\u00a0will invest on your behalf.<\/p>\r\n<p class=\"lt-biz-79765\">The\u00a0mutual fund\u00a0industry is immense. There are approximately 12,000 mutual funds available in the United States. How could this be? Are there 12,000 different types of breakfast cereals in the grocery stores? Are there 12,000 different types of cars or mobile phones available for purchase? Why and how has the number of mutual funds grown to such an unwieldy number? The<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0industry is also very lucrative. The competition is ferocious. As we shall see, the number of categories and numbers of mutual funds has exploded as companies have been competing for business for the past several decades. Also, as mentioned, mutual funds are very popular with employer-sponsored and individual retirement plans. We find that this is the most difficult issue with mutual funds: How do you choose the best\u00a0mutual fund\u00a0for you?! The answer: It ain\u2019t easy! However, once you have chosen a\u00a0mutual fund\u00a0or maybe two or three mutual funds, your work is done. The rest is up to the\u00a0mutual fund.<\/div>\r\n<p class=\"lt-biz-79765\">The graphic below is a very rudimentary representation of how mutual funds work. The people on the lower left are we, the Little Folk. We contribute $25 or $50 or $100 or whatever we can comfortably afford per month to the people in the top hats. These individuals are the\u00a0mutual fund\u00a0managers, also known as portfolio managers, portfolio counselors, and money managers. The\u00a0mutual fund\u00a0managers are highly skilled and well-paid professionals whose job it is to identify, choose, and monitor the underlying investments in the\u00a0mutual fund. If the<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0managers purchase stocks for the\u00a0mutual fund, it is called a\u00a0stock mutual fund. If they purchase bonds, it is called a\u00a0bond mutual fund. If the\u00a0mutual fund\u00a0concentrates on the\u00a0short-term\u00a0\u201ccash\u201d vehicles that we discussed in chapter 1, the\u00a0mutual fund\u00a0is called a\u00a0money market mutual fund\u00a0but is usually just referred to as a money market or money market fund. We also can see that a\u00a0mutual fund\u00a0that invests in both stocks and bonds is called a balanced\u00a0mutual fund. This is just the beginning of the many categories and types of mutual funds. There are literally dozens of other categories. We will learn about a dozen as the rest are variations on the categories that we will cover.<\/div>\r\n<p class=\"lt-biz-79765\">Every month, there are millions of us Little Folk giving billions of dollars to the folks in the top hats. They create huge pools of money, hence the term \u201cmutual funds.\u201d Because this is their career and their full-time job, the\u00a0mutual fund\u00a0managers can afford to identify many choices of their underlying investments. The\u00a0mutual fund\u00a0managers don\u2019t just purchase 10 or 20 stocks or bonds, which is typical for an individual investor. They purchase 100 or 200 or many hundreds of stocks or bonds. Therefore, we find that the two major advantages of mutual funds over individual\u00a0stock\u00a0and\u00a0bond\u00a0investments are\u00a0professional money management\u00a0and\u00a0diversification.<\/p>\r\n<p class=\"lt-biz-79765\"><img class=\"internal\" src=\"https:\/\/biz.libretexts.org\/@api\/deki\/files\/37848\/Chap02_Mutual_Funds_Explained_StickPeople.png?revision=1&amp;size=bestfit&amp;width=677&amp;height=419\" alt=\"Mutual Funds, also known as Investment Companies: Investments for the Masses\" width=\"677px\" height=\"419px\" \/><\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Professional money management<u><\/u>\u00a0is sometimes the subject of some controversy. There are some in the industry and the public who question whether or not the\u00a0mutual fund\u00a0managers are really worth the high salaries they earn. For now, suffice to say that some are and some aren\u2019t. We will discuss this controversy throughout our coverage of mutual funds. However, most investors do not question the advantage of managing the risks inherent in investing through\u00a0<u><\/u>diversification<u><\/u>. Having a wide range of stocks or bonds across the various categories of each will help us eliminate much but not all of the risks of choosing individual stocks and bonds. You have heard the saying, \u201cDon\u2019t put all your eggs in one basket.\u201d With a\u00a0mutual fund, you are putting your eggs into hundreds of baskets. There are some who shun and even mock\u00a0diversification\u00a0but they are not investors. They are the\u00a0short-term\u00a0speculators and traders. They most likely put down this book before reaching the end of chapter 1 since we are catering to prudent, patient,\u00a0long-term\u00a0investors. Dear Students, for us investors,\u00a0diversification\u00a0is a good thing.<\/div>\r\n<\/div>\r\n<footer class=\"mt-content-footer\">\r\n\r\n<hr class=\"autoattribution-divider\" \/>\r\n\r\n<div class=\"autoattribution\">\r\n\r\nThis page titled\u00a0<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/02%3A_Mutual_Funds-_Investments_for_the_Masses\/2.01%3A_Introduction_to_Mutual_Funds\" target=\"_blank\" rel=\"internal noopener\">2.1: Introduction to Mutual Funds<\/a>\u00a0is shared under a\u00a0<a href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\" target=\"_blank\" rel=\"nofollow noopener\">CC BY-NC-SA 4.0<\/a>\u00a0license and was authored, remixed, and\/or curated by\u00a0<a href=\"https:\/\/wonderprofessor.com\/\" target=\"_blank\" rel=\"nofollow noopener\">Frank Paiano<\/a>.\r\n\r\n<\/div>\r\n<\/footer>","rendered":"<p class=\"lt-biz-79765\"><iframe loading=\"lazy\" id=\"iFrameResizer0\" title=\"Chapter 2 - Slides 01-20 - Introduction to Mutual Funds\" src=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.html\" width=\"640\" height=\"480\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><\/iframe><\/p>\n<p class=\"lt-biz-79765\"><a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.html\" href=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.html\" target=\"_blank\" rel=\"external noopener nofollow\">Video<\/a>\u00a0&#8211;\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.mp3\" href=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_Slides_01_to_20\/Chap02_Slides_01_to_20.mp3\" target=\"_blank\" rel=\"external noopener nofollow\">Audio<\/a>\u00a0&#8211;\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_YouTube_01_20.html\" href=\"https:\/\/wonderprofessor.com\/123\/Chap02\/Chap02_YouTube_01_20.html\" target=\"_blank\" rel=\"external noopener nofollow\">YouTube<\/a><\/p>\n<p class=\"lt-biz-79765\">When teaching Introduction to Investments, one is confronted with the thorny problem of where to put mutual funds in the class. There are advantages to having mutual funds taught after stocks and bonds. Since almost all mutual funds rely on stocks and bonds as their underlying investments, it helps to have become acquainted with the ins and outs of\u00a0stock\u00a0and\u00a0bond\u00a0investments before tackling mutual funds. However, the advantages of teaching mutual funds before stocks and bonds are tempting. First, since investing in mutual funds is almost certainly to be in almost everyone\u2019s future via individual and employer-sponsored retirement plans, it pays to be introduced to them as soon as possible, especially since for whatever reasons, many students will drop the class within the first few weeks. Also, as we slog through the copious amount of concepts, definitions, attributes, calculations, etc. of stocks and bonds, inevitably several students will decide, \u201cYa\u2019 know, this stuff just ain\u2019t for me.\u201d That is fine! That is something we hope you will be able to decide for yourself as we progress through the semester. Not everyone will have the time, inclination, aptitude, and most importantly, receive enjoyment from doing the detailed research necessary to identify, choose, and continuously monitor individual\u00a0stock\u00a0and\u00a0bond\u00a0purchases. If you are one of those who decides that investing in individual stocks and bonds is not for you, no problem! That\u2019s why mutual funds exist! But whether you are an\u00a0Investment\u00a0Guru that relies upon mutual funds or one who chooses your own individual stocks and bonds, or both, it is important that you know and understand mutual funds thoroughly. Mutual funds are in your future. And remember that your friends, family members, and colleagues are counting on you. So let\u2019s get started!<\/p>\n<div id=\"section_1\" class=\"mt-section\">\n<h1 class=\"lt-biz-79765 editable\">What is a\u00a0Mutual Fund? An\u00a0Investment\u00a0Company!<\/h1>\n<p class=\"lt-biz-79765\">A\u00a0<u><\/u>mutual fund<u><\/u>\u00a0is an\u00a0<u><\/u>investment<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/i\/investmentcompany.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>\u00a0company<\/u><\/a>\u00a0that invests its shareholders\u2019 money in a diversified portfolio of securities.\u00a0Investment\u00a0company is the legal term;\u00a0mutual fund\u00a0is the popular term. Mutual funds are one type of\u00a0investment\u00a0company; there are others. By far, though, the most popular\u00a0investment\u00a0companies are mutual funds. Although the term\u00a0mutual fund\u00a0does connote that investors are getting together to invest with one another, the term\u00a0investment\u00a0company more accurately describes the work of the\u00a0mutual fund. The\u00a0mutual fund\u00a0will invest on your behalf.<\/p>\n<p class=\"lt-biz-79765\">The\u00a0mutual fund\u00a0industry is immense. There are approximately 12,000 mutual funds available in the United States. How could this be? Are there 12,000 different types of breakfast cereals in the grocery stores? Are there 12,000 different types of cars or mobile phones available for purchase? Why and how has the number of mutual funds grown to such an unwieldy number? The<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0industry is also very lucrative. The competition is ferocious. As we shall see, the number of categories and numbers of mutual funds has exploded as companies have been competing for business for the past several decades. Also, as mentioned, mutual funds are very popular with employer-sponsored and individual retirement plans. We find that this is the most difficult issue with mutual funds: How do you choose the best\u00a0mutual fund\u00a0for you?! The answer: It ain\u2019t easy! However, once you have chosen a\u00a0mutual fund\u00a0or maybe two or three mutual funds, your work is done. The rest is up to the\u00a0mutual fund.<\/div>\n<p class=\"lt-biz-79765\">The graphic below is a very rudimentary representation of how mutual funds work. The people on the lower left are we, the Little Folk. We contribute $25 or $50 or $100 or whatever we can comfortably afford per month to the people in the top hats. These individuals are the\u00a0mutual fund\u00a0managers, also known as portfolio managers, portfolio counselors, and money managers. The\u00a0mutual fund\u00a0managers are highly skilled and well-paid professionals whose job it is to identify, choose, and monitor the underlying investments in the\u00a0mutual fund. If the<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">mutual fund\u00a0managers purchase stocks for the\u00a0mutual fund, it is called a\u00a0stock mutual fund. If they purchase bonds, it is called a\u00a0bond mutual fund. If the\u00a0mutual fund\u00a0concentrates on the\u00a0short-term\u00a0\u201ccash\u201d vehicles that we discussed in chapter 1, the\u00a0mutual fund\u00a0is called a\u00a0money market mutual fund\u00a0but is usually just referred to as a money market or money market fund. We also can see that a\u00a0mutual fund\u00a0that invests in both stocks and bonds is called a balanced\u00a0mutual fund. This is just the beginning of the many categories and types of mutual funds. There are literally dozens of other categories. We will learn about a dozen as the rest are variations on the categories that we will cover.<\/div>\n<p class=\"lt-biz-79765\">Every month, there are millions of us Little Folk giving billions of dollars to the folks in the top hats. They create huge pools of money, hence the term \u201cmutual funds.\u201d Because this is their career and their full-time job, the\u00a0mutual fund\u00a0managers can afford to identify many choices of their underlying investments. The\u00a0mutual fund\u00a0managers don\u2019t just purchase 10 or 20 stocks or bonds, which is typical for an individual investor. They purchase 100 or 200 or many hundreds of stocks or bonds. Therefore, we find that the two major advantages of mutual funds over individual\u00a0stock\u00a0and\u00a0bond\u00a0investments are\u00a0professional money management\u00a0and\u00a0diversification.<\/p>\n<p class=\"lt-biz-79765\"><img decoding=\"async\" class=\"internal\" src=\"https:\/\/biz.libretexts.org\/@api\/deki\/files\/37848\/Chap02_Mutual_Funds_Explained_StickPeople.png?revision=1&amp;size=bestfit&amp;width=677&amp;height=419\" alt=\"Mutual Funds, also known as Investment Companies: Investments for the Masses\" width=\"677px\" height=\"419px\" \/><\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Professional money management<u><\/u>\u00a0is sometimes the subject of some controversy. There are some in the industry and the public who question whether or not the\u00a0mutual fund\u00a0managers are really worth the high salaries they earn. For now, suffice to say that some are and some aren\u2019t. We will discuss this controversy throughout our coverage of mutual funds. However, most investors do not question the advantage of managing the risks inherent in investing through\u00a0<u><\/u>diversification<u><\/u>. Having a wide range of stocks or bonds across the various categories of each will help us eliminate much but not all of the risks of choosing individual stocks and bonds. You have heard the saying, \u201cDon\u2019t put all your eggs in one basket.\u201d With a\u00a0mutual fund, you are putting your eggs into hundreds of baskets. There are some who shun and even mock\u00a0diversification\u00a0but they are not investors. They are the\u00a0short-term\u00a0speculators and traders. They most likely put down this book before reaching the end of chapter 1 since we are catering to prudent, patient,\u00a0long-term\u00a0investors. Dear Students, for us investors,\u00a0diversification\u00a0is a good thing.<\/div>\n<\/div>\n<footer class=\"mt-content-footer\">\n<hr class=\"autoattribution-divider\" \/>\n<div class=\"autoattribution\">\n<p>This page titled\u00a0<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/02%3A_Mutual_Funds-_Investments_for_the_Masses\/2.01%3A_Introduction_to_Mutual_Funds\" target=\"_blank\" rel=\"internal noopener\">2.1: Introduction to Mutual Funds<\/a>\u00a0is shared under a\u00a0<a href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\" target=\"_blank\" rel=\"nofollow noopener\">CC BY-NC-SA 4.0<\/a>\u00a0license and was authored, remixed, and\/or curated by\u00a0<a href=\"https:\/\/wonderprofessor.com\/\" target=\"_blank\" rel=\"nofollow noopener\">Frank Paiano<\/a>.<\/p>\n<\/div>\n<\/footer>\n","protected":false},"author":33,"menu_order":9,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-506","chapter","type-chapter","status-publish","hentry"],"part":485,"_links":{"self":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/506","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/users\/33"}],"version-history":[{"count":1,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/506\/revisions"}],"predecessor-version":[{"id":507,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/506\/revisions\/507"}],"part":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/parts\/485"}],"metadata":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/506\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/media?parent=506"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapter-type?post=506"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/contributor?post=506"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/license?post=506"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}