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They are investment choices for most individual investors. A Mutual fund is an arrangement of stocks and bonds but investors do not possess separate portfolios; they rather pool their money together so that each one owns a share of the fund.
The earning that investors make with mutual funds investments come primarily from the interests on bonds and dividends on stock. Moreover, when the fund makes a capital gain by selling securities that have increased in price, the earnings are usually distributed to the investors. Finally, at any time, an investor can sell his own shares that have increased in price and make a potential profit.
Basically, there are three major types of mutual funds:
Equity funds are the most popular, they invest in stocks.
The fixed income funds present a risk pattern depending on the underlying bonds, the riskiest (but also a high yield) being the junk bond fund.
The third kind of mutual fund is the money market fund consisting of short-term debt instruments, especially treasury bills (less than one year maturity).
There are many advantages with mutual funds: they are quite simple to buy and are managed by professionals that operate and monitor investments. Also, their liquidity is highly appreciated as well as their diversification that reduces significantly the risk. However, investment gains from mutual funds are usually taxable.
Some famous mutual funds: Fidelity Magellan, Washington mutual, PIMCO total return�etc.