What Are Mutual Funds?

Andrei Paulavets
Investment professional with a strong engineering background, leveraging machine learning and generative AI to enhance investor financial analysis and data-driven decision-making in financial markets.

Introduction

A critical part of investing is understanding the vehicles at your disposal. Mutual funds, one of the most prevalent types of investment tools, offer diversification and professional management, making them an attractive choice for many investors.

What are Mutual Funds?

A mutual fund is a type of investment vehicle made up of a pool of money collected from many investors. The purpose of a mutual fund is to invest this pooled money in a diversified portfolio of different assets, which can include stocks, bonds, and other securities. A professional money manager usually operates mutual funds, making investment decisions based on the fund’s objectives.

How do Mutual Funds Work?

When you invest in a mutual fund, you’re purchasing shares or units of the fund. Each share represents an ownership portion of the overall portfolio. The total value of the mutual fund (or its net asset value, NAV) is the sum of all the securities it owns divided by the number of shares outstanding.

Unlike ETFs or stocks, mutual fund shares are not traded on an exchange and their price doesn’t fluctuate throughout the day. Instead, mutual fund shares are bought or sold directly from the fund at the NAV price calculated at the end of each trading day.

Benefits of Mutual Funds

Mutual funds offer several notable benefits:

  1. Professional Management: Mutual funds are managed by professional money managers, who make investment decisions on behalf of the fund’s shareholders.
  2. Diversification: By owning shares in a mutual fund, you’re investing in a broad range of assets, which can help to spread risk and potentially enhance returns.
  3. Accessibility: Many mutual funds have relatively low minimum investment requirements, making them accessible to a wide range of investors.
  4. Variety: There is a wide variety of mutual funds available, ranging from sector-specific funds to funds focused on income generation, allowing investors to find funds that align with their specific investment goals and risk tolerance.

Risks and Considerations

Despite their benefits, mutual funds also come with certain risks and considerations:

  1. Management Risk: The success of a mutual fund depends heavily on the skill of the fund manager. Poor decision-making by the manager can negatively impact the fund’s performance.
  2. Costs: Mutual funds can come with a variety of fees and expenses, including management fees, distribution fees, and transaction costs, which can eat into returns over time.
  3. Liquidity Constraints: Unlike stocks and ETFs, mutual fund shares can only be bought and sold at the end of the trading day, which could limit your ability to respond to market fluctuations.
  4. Lack of Control: When you invest in a mutual fund, you cede control over individual investment decisions to the fund manager.

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EODHD data for mutual funds

You can find data for mutual funds under the exchange code EUFUND, to get the list of tickers you can use the following API request:

https://eodhistoricaldata.com/api/exchange-symbol-list/EUFUND?api_token=YOUR_API_KEY&fmt=json

You can get historical End-of-Day data for tickers using our End-of-Day API:

https://eodhistoricaldata.com/financial-apis/api-for-historical-data-and-volumes/

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Conclusion

Mutual funds can be a powerful tool in an investor’s arsenal, providing professional management, diversification, and accessibility. However, they are not without their risks and potential drawbacks. As with any investment, it’s essential to understand how mutual funds align with your financial goals, risk tolerance, and investment horizon before investing. Always consider seeking advice from a financial advisor or conducting thorough research to ensure that the mutual fund you choose is the best fit for your investment strategy.