Mutual Fund

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This is a relatively easy way for individuals to invest in a lot of different stocks or bonds, more than the individual might otherwise be able to do by investing herself. A mutual fund collects money from lots of investors and because the total amount collected is sufficiently large, the fund can invest the money in many different ways. You usually buy shares in the mutual fund itself, and the value of those shares goes up or down depending on how the investments made by the fund money managers perform (see Net Asset Value). In 2009, there were well over 7,000 mutual funds. They usually charge an annual fee to the investors, often based on the total value of the investments, so if the value goes up, so does the fund manager's fee. Some funds impose a sales charge called a "load" when they buy or sell stock; those that do not impose these charges are called "no-load" funds. Funds come in all types and sizes, and they invest in all sorts of stocks, foreign and American, as well as bonds. Some specialize in high-risk stocks with possibly high profits; some take a cautious and safer approach but with less chance of high growth. Some simply invest in a broad selection of the leading shares and passively ride up and down with them as the stock market moves up and down. These are called index funds. There are also money market funds, which invest only in securities that are highly liquid and can be easily converted into cash. Because there is no limit to the number of shares that can be issued by the mutual fund, it is known as an "open-end fund." This contrasts with a different kind of investment company known as a closed-end fund, in which no new shares are issued. Mutual funds were very popular in the early and mid-1990s, although in the early years of the twenty-first century investors realized that the fees can be expensive, and also that individual investors cannot control what the fund managers buy and sell or when they do it. This means there is a capital gains tax concern: if the fund managers decide to sell a lot of the securities owned by the fund, the fund participants may have to pay capital gains tax on any capital gains made on the sale of those securities. This is why many people use mutual funds as part of their IRAs, because there is typically no tax payable on IRA transactions: tax is only due at the time money is withdrawn from the IRA in the future. See also Exchange Traded Funds, which are in some ways like mutual funds but also have significant differences, Fund of Funds, and Hedge Funds.