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Mutual Funds  

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A mutual fund is a group (portfolio) of stocks and bonds that are bundled together and offered for purchase from an investment company. Many investors can then pool their money and each becomes a shareholder of the fund rather than a specific company or debt instrument. The stocks and bonds chosen for each mutual fund are based on the stated objective of the mutual fund and each fund has a professional fund manager. Some mutual funds are based on market capitalization, others on particular industries, and some try to mimic the common stock indexes. In any case the mutual fund itself is managed by a specific set of goals and objectives; each with varying degrees of risk and associated return.

The way mutual funds are priced is called net asset value (NAV) per share, which is found by subtracting from the market value of the portfolio the mutual fund's liabilities and then dividing by the number of mutual funds outstanding.

NAV per share = (market value of portfolio - liabilities) / number of fund outstanding

Mutual funds allow investors to have diversified portfolios without the high costs of trading stocks and bonds individually but investors need to pay close attention to the management fees for the various mutual funds and include those fees in their estimation of return.

Related Terms: Common Stocks - Dow Jones Industrial Average (DJIA) - Standard and Poor's 500 Index - S&P 500 - New York Stock Exchange (NYSE) - Wall Street - Brokerage Account - ETF

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