Mutual funds are collective investment vehicles that pool investor money and then invest it in public markets. Mutual funds have been an important part of the investment landscape for decades, with the oldest still-operating funds launched in the 1920s, though earlier versions of the same concept can be traced back centuries. Mutual funds are typically made up of a variety of stocks and other securities such as bonds, commodities, and derivatives.
There are multiple different structures available to mutual fund investors. Some, such as unit trusts, involve investing in units of a larger fund, while others lock in client assets into a single fund that is then reinvested in a range of assets.
Mutual funds come in two main categories: active and passive.
Active mutual funds: Active mutual funds are managed by professional fund managers who actively buy and sell securities to outperform a particular market benchmark or index. Traders typically pay higher fees than passive funds due to the additional research and management required.
Passive mutual funds: Passive mutual funds are designed to track a specific market index or benchmark, aiming to replicate the performance of the broader market with a diversified portfolio of securities that mirrors the index or benchmark. Traders typically pay lower fees than active funds as they require less management and research. Actively managed funds attempt to beat the return of an index by holding different.
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