A mutual fund is a professionally managed investment fund that pools
money from many investors to purchase securities. Mutual funds have
advantages and disadvantages compared to direct investing in individual
securities. The primary advantages of mutual funds are that they provide
a higher level of diversification, they provide liquidity, and they are
managed by professional investors. On the negative side, investors in a
mutual fund must pay various fees and expenses. Primary structures of
mutual funds include open-end funds, unit investment trusts, and
closed-end funds. Exchange-traded funds (ETFs) are open-end funds or
unit investment trusts that trade on an exchange. Mutual funds are also
classified by their principal investments as money market funds, bond or
fixed income funds, stock or equity funds, hybrid funds or other. Funds
may also be categorized as index funds, which are passively managed
funds that match the performance of an index, or actively managed funds.
Hedge funds are not mutual funds; hedge funds cannot be sold to the
general public and are subject to different government regulations.
Mutual funds were introduced to the United States in the 1890s. Early
U.S. funds were generally closed-end funds with a fixed number of shares
that often traded at prices above the portfolio net asset value. The
first open-end mutual fund with redeemable shares was established on
March 21, 1924 as the Massachusetts Investors Trust. (It is still in
existence today and is now managed by MFS Investment Management.) In the
United States, closed-end funds remained more popular than open-end
funds throughout the 1920s. In 1929, open-end funds accounted for only
5% of the industry's $27 billion in total assets.
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