A mutual fund is a collection of stocks, bonds or other securities owned by a group of investors and managed by a professional investment company. Mutual funds fall into three main categories:

• Stock funds (also known as “equity funds”)
• Bond funds (also known as “fixed income funds”)
• Money market funds

Mutual funds have remained popular with investors because they offer many advantages including professional management and diversification.

Professional Management – Many individual investors do not have the resources or expertise to pick individual stocks on their own and prefer professionals to select stocks on their behalf. These individuals benefit from the knowledge and experience of professional investment managers who are dedicated to security analysis, evaluation and selection.

Diversification — Not “putting all your eggs in one basket” is an important way to limit risk. Since mutual funds generally invest in a wide range of securities, they provide immediate diversification. And since mutual funds are sold in shares, no matter how much you invest, you own a proportionate amount of all the fund’s holdings.

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Stocks can be classified on the basis of size, otherwise known as market capitalization. A stock's market capitalization is calculated by multiplying its share price by its total number of shares outstanding.

Many investors consider market capitalization as it can significantly affect stock returns. In general, smaller companies (small caps) have a potential for higher returns, but this also comes with higher risks. Conversely, larger companies (large caps) may be viewed as lower risk as they are more stable, but they also come with lower potential for returns.

When comparing portfolio returns, be sure to compare apples to apples. For example, an investor should compare small cap funds to other small cap funds, mid cap funds to other mid cap funds, and so on.

To learn more, please visit our Education Center.