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Introduction

A mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company.

There are thousands of different mutual funds for sale by mutual fund companies. Since a mutual fund is actually a collection of different investments, each fund offers a different balance of various kinds of stocks, bonds, and other securities. This mixture of investments is called the mutual fund's investment portfolio.

Most investment professionals agree that it's smarter to own a variety of stocks and bonds than to gamble on the success of a few. But diversifying can be tough because buying a portfolio of individual stocks and bonds may be expensive. And knowing what to buy - and when - is a full-time job.

Mutual fund companies use the money from their investors to purchase shares of the securities in their portfolio. In this way, mutual funds pool investors' money to create more buying power than the individual investors would have on their own.

Investors put their money into a mutual fund expecting their investment to increase in value, provide income, or both.

The Appeal of Mutual Funds

That's why you've probably been discovering mutual fund investors cropping up in the most unlikely places. The minimum investments can be so low that even a debt-ridden grad student can afford to buy in; and the process is so simple that even that really dumb guy who lives upstairs can figure out how to turn a profit.

Here are some of their biggest advantages:

• A mutual fund lets you invest whenever you like, and in whatever amounts you have available, as long as you meet the minimum - usually $100 - each time. Some mutual fund companies now offer investment opportunities with no minimum investment.
  
Since a fund can own hundreds of different securities, its success isn't dependent on how one or two holdings do. And the fund's professional managers keep constant tabs on the markets, adjusting the portfolio for the strongest possible performance.

• Mutual funds offer liquidity, which means you can turn your investment back into cash at any time by selling your shares. The risk is that you might get back less than you invested if the value of your shares is down when you sell.
  
• Each fund is explicit about its investment goals, so you can choose between investing for current income or future growth, or buy a combination of funds to do both at the same time.
  
• All funds offer reinvestment options, which let you buy more shares automatically with your earnings. Often there's no charge for reinvesting.
  
• Many funds sell directly to you, without the expense of buying through a broker.

• You don't have to accumulate large sums to invest or have enough on hand to buy a fixed number of shares.
  
• You can sell your investment easily in an emergency, although you may lose some capital.
  
• You can choose funds to meet your investment goals.
  
• You can build your investment on a regular basis.
  
• You can avoid some of the expenses of investing in stocks and bonds directly.