AARP Financial

What Are Mutual Funds


Think of a mutual fund as a way for many investors to pool their money and have it professionally managed toward a common investment goal. A fund may invest in stocks, bonds, cash equivalents or a combination, depending on its stated objectives.

As an investor in a mutual fund, you own a portion of the fund, sharing in any increases or decreases in the value of the fund. You have the benefit of having someone else manage your investments, take care of recordkeeping for your account, and spread your investment dollars over many different types of securities.

Why buy mutual funds?

For most investors, the main reason to put money into mutual funds is their potential for long-term growth or current income. But there are many other benefits mutual funds can provide:

  • Diversification — Simply by investing in a mutual fund, you get a measure of diversification. But despite the built-in diversification offered by mutual funds, it's important to choose a mix of funds that provide the right risk/reward balance for your needs.
  • Professional research and management — If you're like most people who don't have the time or energy to thoroughly research individual stocks or bonds, a mutual fund makes a lot of sense.
  • Cost efficiency — By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own.
  • Liquidity — With most funds, you can easily sell your fund shares for cash. Mutual fund shares are purchased and redeemed at the next net asset value calculated after an order is received; while stocks and bonds can be bought or sold any time the markets are open at whatever price is then available.


These articles are not meant to be a financial plan. A financial plan generally addresses a wide spectrum of financial needs including insurance, savings, investments, tax and estate planning.