A mutual fund is a single portfolio of stocks, bonds, and/or cash that is managed by an investment company on behalf of many investors. Every mutual fund has a manager, also known as an investment adviser, who directs the fund's investments according to the fund's objective; i.e. high current income, long-term growth, principal stability, etc. The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. When an investor purchases shares in a mutual fund, he or she becomes part-owner of a large investment portfolio, along with all the other shareholders of the fund. The fund manager invests that money, along with the funds contributed by the other shareholders.

There are numerous advantages to investing in mutual funds. For one, new investors often prefer to rely on the expertise of a fund's investment adviser. With access to extensive research, market information, and skilled securities traders, the adviser is much better equipped and prepared to decide which securities to buy and sell for the fund. Also, a single mutual fund can hold securities from hundreds or even thousands of issuers, far more than most investors could afford on their own. This diversification sharply reduces the risk of a serious loss due to problems in any one particular company or industry.

Shares in a mutual fund can be bought and sold on any business day, so investors have easy access to their money. While many individual securities can also be readily bought and sold, others aren't as widely traded. In those situations, it could take several days or even longer to build or liquidate a position. In addition, mutual funds offer services that make investing easier. Fund shares can be bought or sold by mail, telephone or the internet, so that money can easily be moved from one fund to another as the investor’s financial needs change.

There are, of course, disadvantages to go along with the advantages. As with any other investment instrument, there are no guarantees with mutual funds. Their value can fluctuate, and an investor’s money can increase or be lost. As such, they are regulated by the Securities and Exchange Commission (SEC), which requires fund companies to disclose the information an investor needs in order to make sound decisions. This information is commonly known as a prospectus. And, while diversification does eliminate the risk of extreme losses that would occur if an investor owned a single security whose value plummeted, it also limits the potential for making very large gains in the market if that security's value were to soar.

Although mutual funds can be a lower-cost way to invest when compared with buying individual securities through a broker, some funds have been known to reduce their investors’ rate of return due to sales commissions and high company operating expenses. And profits that are gained on mutual fund investments are typically subject to federal (and often, state and local) income taxes unless the fund is invested through a tax-free retirement or education account.

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