Mutual funds

A mutual fund is a professionally-managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. A mutual fund has a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective.

In the United States, a mutual fund is registered with the Securities and Exchange Commission (SEC) and is overseen by a board of directors (if organized as a corporation) or board of trustees (if organized as a trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. Under Internal Revenue Service (IRS) rules, a U.S. mutual fund must distribute effectively all of its net income and net realized gains from the sale of securities at least annually.

Since 1940, with the passage of the Investment Company Act of 1940 (the '40 Act), there have been three basic types of registered investment companies in the United States: open-end funds (or mutual funds), unit investment trusts (UITs); and closed-end funds. Recently, exchange-traded funds (ETFs), which are a type of open-end fund or unit investment trust that trades on an exchange, have gained in popularity. Hedge funds are not considered a type of mutual fund; while they are another type of commingled investment scheme, they are not governed by the Investment Company Act of 1940 and are not required to register with the Securities and Exchange Commission.

In the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles available to the general public, such as unit trusts, open-ended investment companies (OEICs, pronounced "oyks"), unitized insurance funds, UCITS (Undertakings for Collective Investment in Transferable Securities, pronounced "YOU-sits") and SICAVs (société d'investissement à capital variable, pronounced "SEE-cavs")