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When you purchase shares in a mutual fund, your money is invested in a large number of companies all at once, and your investment risk is spread out over many stocks of many companies, not just one. The ups and downs in the value of your investment with a mutual fund may not be as volatile as with an individual stock because you are more diversified.

Mutual funds make it easy for you to invest in stocks and bonds. And the two main advantages of investing your money in mutual funds are;

1) you receive professional money management

2) you are able to truly diversify your holdings with a small sum of money

Each mutual fund has one or more fund managers who are skilled in principles of money management. They have access to a huge database of research — so basically you’re leaving the driving to them.

Each fund also has a particular objective. That objective is defined in the fund’s prospectus, which describes a mutual fund and offers its shares for sale. The prospectus provides information such as investment objectives, charges, expenses and operating policies.  A prospectus must be provided to an investor at the time of the sale.  The investor should read it carefully before sending money or investing.

The objective could be for example long-term growth, current income, or a combination of income and growth. For example, the objective of XYZ fund is long-term growth. To accomplish the fund’s objective, the fund manager invests the money received from its shareholders (that’s you) by purchasing shares of many individual companies (or leaving a small portion in cash.)

Some stock mutual funds can own shares of stock from a few hundred companies, thereby limiting its holdings in any one company to no more than 5-6% of all the assets in the mutual fund. This is true diversification and your risk is less than if you invested in just one or two individual stocks.