How Mutual Funds Work

Investors are often advised to put their money into mutual funds. MoneyWatch's Jill Schlesinger explains fund management, pricing, and more.

Mutual funds are pooled investments which can invest in a variety of assets like stocks, bonds, money markets or real estate. So the performance of a mutual fund depends on the performance of each of the individual securities held by the fund. Unlike individual stocks mutual funds are priced at the end of the day. That means if you buy at 130 and prices rise by the 4pm close your fund purchase is based on the price of the fund at 4:00. Funds can be actively or passively managed. Active funds have a stated objective. That is a focus on large or small, growth or value, US or internationals stocks. Fund managers have the freedom to move your money around within the designated categories to attempt to earn as much as possible for you. Passive funds are static baskets of assets which invest in the same companies that comprise a specific index such as the SMP 500 index or bond index. Changes to the fund only occur when there's a change in the relevant index. Benefits of mutual funds include diversification and professional money management. You can buy a mutual fund through a broker, banker, insurance salesman, investment advisor or from the fund company directly which is usually the cheapest option.