Securities Markets

Mutual Funds

Suppose that you have $1,000 to invest but don't know which stocks or bonds to buy, when to buy them, or when to sell them. By investing in a mutual fund, you can buy shares in a large, professionally managed portfolio, or group, of stocks and bonds. A mutual fund is a financial-service company that pools its investors' funds to buy a selection of securities – marketable securities, stocks, bonds, or a combination of securities – that meet its stated investment goals. Each mutual fund focuses on one of a wide variety of possible investment goals, such as growth or income. Many large financial-service companies, such as Fidelity and Vanguard, sell a wide variety of mutual funds, each with a different investment goal. Investors can pick and choose funds that match their particular interests. Some specialized funds invest in a particular type of company or asset: in one industry such as health care or technology, in a geographical region such as Asia, or in an asset such as precious metals.

Mutual funds are one of the most popular investments for individuals today: they can choose from about 9,500 different funds. Investments in mutual funds are more than $40 trillion worldwide, of which U.S. mutual funds hold more than $19 trillion. About 94 million individuals, representing 55 percent of all U.S. households, own mutual funds.

Mutual funds appeal to investors for three main reasons:

Moody's and Standard & Poor's Bond Ratings
Moody's Ratings S & P Ratings Description
Aaa AAA Prime-quality investment bonds: Highest rating assigned; indicates extremely strong capacity to pay.
Aa, A AA, A High-grade investment bonds: Also considered very safe bonds, although not quite as safe as Aaa/AAA issues; Aa/AA bonds are safer (have less risk of default) than single As.
Baa BBB Medium-grade investment bonds: Lowest of investment-grade issues; seen as lacking protection against adverse economic conditions.
Ba

B

 BB

B

 Junk bonds: Provide little protection against default; viewed as highly speculative.
Caa

Ca

C

 CCC

CC

C

D

 Poor-quality bonds: Either in default or very close to it.

  • They are a good way to hold a diversified, and thus less risky, portfolio. Investors with only $500 or $1,000 to invest cannot diversify much on their own. Buying shares in a mutual fund lets them own part of a portfolio that may contain 100 or more securities.
  • Mutual funds are professionally managed.
  • Mutual funds may offer higher returns than individual investors could achieve on their own.