In layman's terms, what is a Mutual Fund?

In layman's terms, what is a Mutual Fund?

In laymen's terms:

For you or me to buy individual stocks costs too much in expenses and we can't diversify enough. So you and I and some of our friends get together and pool our money so we can do it collectively to solve those problems (mutual fund). We don't want to watch over the investments ourselves because we are too busy and aren't experts so we hire a guy to watch over it for us (fund advisor). As compensation we pay him a small percentage of the value of our assets (expense ratio and/or load). We might tell him that we only want to invest in certain kinds of stocks or other assets (e.g. sector funds or just general limitations like big company vs. small company). We expect him to do well and beat at least what we could do alone and hopefully the market too (fund performance).

That's pretty much what a mutual fund is. In reality the scale is different : a lot of people and a lot of details and rules and stuff. But that's pretty much the idea. And there are mutual funds that actually begun with the simple presentation above.

Hope this is helpful...

A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. [1] In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value (NAV), is calculated daily based on the total value of the fund divided by the number of shares purchased by investors.

Legally known as an "open-end company", a mutual fund is one of three basic types of investment companies available in the United States.[2] Outside of the U.S. (with the exception of Canada which follows the US model), mutual fund is a generic term for various types of collective investment. In the UK and western Europe (including offshore jurisdictions), other forms of collective investment are prevalent including unit trusts, Open-Ended Investment Companies (OEICs), SICAVs and unitized insurance funds.

It is a pool of individual stocks. For example a US Large Cap fund invests in large sized US based companies like Exxon, Wal Mart, AT&T etc. The managers of the fund buy thousands of shares onfthese companies and pool them together and offer the fund to us at a certain price.

Without copy/paste from an encyclopedia...(layman's terms!)

I'm a mutual fund company. I'm going to take the money you give me and add it to a few thousand other people. I buy stocks in a couple of hundred companies. Stocks go up > the amount of money you have in me goes up. Stocks go down > the amount of money you have in me is less.