Mutual fund

A mutual fund is a selection of professionally bought and managed stocks in which money is pooled by an investment company. The funds continually offer new shares and buys existing shares back on demand and uses its capital to invest in diversified securities of other companies.

The share price of the mutual fund is based on the net value of the assets or the value of all the investments owned by the fund, less any debts. The major advantage of mutual funds is a reduced risk - the money is spread across several investments. If one or two do poorly, the remainder may do better, averaging the loss. For many small investors, another advantage of mutual funds is that they do not have to watch the stock markets constantly, and do extensive research into each stock.

A mutual fund may invest in bonds, stocks, or both. It may track a major index (such as the Dow Jones Industrial Average or the Standard and Poor's 500) or may invest in a sector of the economy (such as a mutual fund investing in retail stocks, or bonds issued within the state of Texas). It may also be a mix of other mutual funds.

A "target date" fund is a special type of mutual fund which is designed for long-term retirement investing: in the early periods the fund will invest heavily in stocks and more risky investments, but as the date approaches the fund will shift to conservative investments (though with some risk in order to keep pace with inflation) so as to preserve capital. An example is the "Lifecycle" Fund series within the United States Government Thrift Savings Plan; funds with years closer to today's date are invested more prominently in the income fund offerings (G and F) while those with dates far off are invested more prominently in the stock fund offerings (C, I, and S).

Sources

http://usinfo.state.gov/products/pubs/oecon/chap12.htm