While mutual funds have existed since the 1920s, they grew in popularity during the 1960s, and in the late 1970s were being used as an alternative investment vehicle to corporate pension plans. Mutual funds are a collective investment portfolio that pools people’s money together, and are managed by a fund manager. They vary by a host of factors that include type, organization, fee, and exposure to risk. For instance, an open-ended mutual fund can issue new shares to investors at the end of the trading day, but are also required to buy back shares to be redeemed. As a result, mutual funds need to remain more liquid. Closed-end funds on the other hand, are tradeable throughout the day, and as such, behave more like stocks. In that respect they are more open, but closed in the sense that they are similar to Initial Public Offering (IPOs) that only issue stocks once, and don’t focus on attracting additional investor capital after the initial offering.
Other types of mutual funds include exchanged-traded funds, equity funds, funds that focus on market-cap, market-money, and hedge funds. There are also fund-of-funds, which are mutual funds that invest in other mutual funds. Some of these funds follow an index—such as the DJIA, TSX, and S&P 500—and try to replicate the performance of one of these indexes, while others are actively managed and try to beat the market the index follows. Each fund type adopts a different focus in terms of risk, asset allocation, and industry. Some funds might also focus on blue chip companies, socially responsible companies, a specific industry or emerging markets.
For an average investor, mutual funds remain the most convenient and easy way to be invested. Because the fund holds a basket of securities, investors achieve instant diversification, which is quite difficult to replicate if buying securities individually. Moreover, mutual funds are often the only way to access markets such as China or India, as shares for companies in those countries are usually traded on local exchanges. For all these reasons, it’s obvious why mutual funds are the most popular traded investment vehicle, with a total asset worth of $12 trillion in North America.