Learn about Mutual Funds with iMinds Money's insightful fast knowledge series.
A mutual fund is an investment vehicle that allows a group of investors to pool their money, allowing a professional to collectively trade securities on their behalf in exchange for a small fee. The pooled funds are used to purchase a diverse range of assets and provide a return to the investor. Typically the assets purchased are shares of companies and so reflect share market movements, but some funds focus on other markets such as property. Although the term 'mutual fund' has specific meaning in United States law, it is globally synonymous with the names managed fund, unit trust or collective investment.
The origin of mutual funds can be traced back to a Dutch merchant, who in 1874 created a trust that accepted funds from several small investors. King William I appropriated this idea nearly fifty years later, launching investment companies in the Netherlands that placed a strong focus on investment diversification. It is this diversification that is the strength of the mutual fund. By pooling their funds a group of investors can afford to invest in a wider range of assets than would be possible individually. The benefits of investment diversification come from the exploitation of economies of scale in two ways. Firstly, brokerage costs are significantly reduced and the purchase of wholesale investment assets – which are typically issued in denominations of $1 million or more – becomes possible. Secondly, unsystematic risk is reduced by the diversification of the investment portfolio.
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