* Site-Outage Notice: Our engineering elves will be tweaking the Shmoop site from Monday, December 22 10:00 PM PST to Tuesday, December 23 5:00 AM PST. The site will be unavailable during this time.
Dismiss
© 2014 Shmoop University, Inc. All rights reserved.

Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Mutual Funds

Definition:

A mutual fund is a collection of stocks and/or bonds which are professionally managed for the benefit of investors in them. Mutual funds exist because individual investors generally have neither enough money nor experience to properly diversify a portfolio. 12 shares of Coca Cola, 18 shares of Disney, 32 shares of GE, etc. are very expensive to buy individually. A professional money manager aggregates lots of small buyers into a big fat pot of money, which then effectively gets volume discounts" for the purchases and sales of shares.

Mutual funds are usually sold with a "load," which is a fancy term for sales charge, along with a fee for managing the fund. There is a fabulous myth marketed aggressively to retail buyers that consumers get a great deal on "no load" funds. Traditionally mutual funds were sold through brokers who charged between 1.5 and 7% commission, depending on the size of the purchase and the perceived "quality" or track record of the fund. Mutual funds were in the business of managing money, not selling it so they were happy with their roles as buyers and sellers of stocks and bonds and they let brokers broker.

Then brokers got into the mutual fund business for a variety of reasons, mainly because they thought they could make money doing it. But there was a hole in the market because many mutual funds underperformed indexes - in theory, more than half anyway - and brokers felt they had leverage.

Mutual funds fought back - think: Star Wars with geeks in glasses fighting with pens - and began to broker their own funds. Fidelity was the most successful of funds becoming "supermarkets" of financial services. Schwab was the most successful broker who went into the funds businesses and/or wholesaled other funds."

Advertisement