A collective investment vehicle that pools investments from many investors to provide economies of scale, specifically thorough diversification and lower investment expenses. A mutual fund may be either passively managed—designed to replicate the performance of an asset class or specific index less investment expenses—or actively managed—the portfolio is managed by a professional investment manager with the objective of delivering a higher risk-adjusted return than a passive strategy or specifically named index.
- Provides thorough diversification even for small investors
- Professional management
- Liquidity—investors can withdraw their investment easily with little or no transactions costs
- Actively managed mutual funds may not outperform passive alternatives, which are less expensive
- Can produce phantom income, which means you could pay taxes on gains you never received
1. Who is the manager and how long have they been managing the fund?
2. What is the specific investment objective of the fund?
3. What is the performance record of the fund compared to the index it is measured against?
4. What is the turnover of the fund and how does the turnover impact the total expenses paid by investors in the fund?
5. What are the total expenses paid by investors in the fund?