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Mutual Fund Basics
What is a mutual fund?
A mutual fund is a portfolio, or collection, of individual securities (some combination of stocks, bonds, or money market instruments) managed according to a specific objective spelled out in the fund's prospectus. A mutual fund allows investors to pool their money, then the fund invests it on their behalf.
Unlike individual stocks, whose value fluctuates minute by minute, mutual funds are priced at the end of each day the market is open, based on what the securities in the portfolio are worth. The price per share, or net asset value (NAV), of a mutual fund is the current market value of the fund's net assets divided by the number of shares outstanding. Investors buy and sell shares in the fund based on its NAV as of the next market close.
Why invest in a mutual fund?
Diversification is one of the key reasons for investing in mutual funds. Most investors are concerned about the risks associated with financial markets; namely, that their investments will lose money or will not grow enough over time to outpace inflation and meet their future financial needs. While the risks of the stock market cannot be eliminated, there are various strategies used to reduce the level of risk. One such strategy is diversification.
With a single investment in a stock or bond, an investor essentially has all of his or her eggs in one basket. With a mutual fund investment, by contrast, an investor typically gains exposure to dozens of securities, thereby spreading risk across a range of securities. Assuming that the mutual fund's portfolio is itself properly diversified, the Fund's value should not fluctuate as widely as the price of an individual stock.
An investment in several mutual funds that have different investment objectives can result in even broader diversification. Some mutual funds that have only a few stocks in their portfolio or focus solely on particular sectors (i.e., technology or healthcare) are considered non-diversified. An investor would have to invest in several non-diversified funds to achieve diversification and reduce certain risks. For more information on diversification, see Asset Allocation.
Mutual funds are managed by investment professionals, who have the knowledge and expertise to buy and sell securities that fit the investment objectives of the fund. Most fund managers have extensive educational and professional credentials and years of experience managing money.
For an individual investor, buying and selling individual stocks or bonds can be complicated, requiring extensive knowledge of financial markets, expensive, because of brokerage costs, and time consuming. Mutual funds greatly simplify the investment process by providing investors a ready-made professionally managed portfolio at a reasonable cost. Mutual fund shares can also be readily bought and sold at a price calculated daily - the Net Asset Value per share (or NAV). Some mutual funds charge a "load" or sales charge to invest (a "front end load") or sell your shares ("back end load"). All of the Domini Funds are "no-load" meaning that there is no fee charged to invest in our funds, or to sell your shares. Although the Domini Funds' Investor shares are no-load, certain fees and expenses apply to a continued investment, as described in the Funds' current prospectus.