<p>Mutual Funds are pooled investment vehicles managed by professionals. They collect money from many investors and invest it in a diversified portfolio of stocks, bonds, or other securities.</p>

<h2>How It Works</h2>
<p>Here's how mutual funds operate:</p>
<ul>
  <li>Investors buy shares in the fund, which represent a portion of its total holdings.</li>
  <li>The fund's manager uses the collected money to purchase a mix of securities, aiming to meet the fund's stated investment objectives.</li>
  <li>Shareholders' profits or losses are determined by the fund's net asset value (NAV), which is calculated by dividing the total value of the fund's assets by the number of outstanding shares.</li>
  <li>Mutual funds can be actively managed, with professionals selecting securities, or passively managed, tracking a market index.</li>
</ul>

<h2>Why It Matters</h2>
<p>Mutual funds matter because they provide several benefits to investors:</p>
<ul>
  <li><strong>Diversification</strong>: By investing in a mutual fund, investors can gain exposure to a wide range of securities, reducing risk through diversification.</li>
  <li><strong>Professional Management</strong>: Mutual funds offer access to professional investment management skills and expertise.</li>
  <li><strong>Liquidity</strong>: Mutual funds allow investors to buy or sell shares daily, providing liquidity and flexibility.</li>
  <li><strong>Affordability</strong>: With low or no minimum investment requirements, mutual funds make it easy for investors to start building a diversified portfolio.</li>
</ul>
<p>For example, an investor seeking broad market exposure might choose an <a href="/NewSite/encyclopedia/index-fund/" class="ency-link">index fund</a>, a type of mutual fund that passively tracks a market index like the S&P 500. This provides diversification, professional management, and low costs, making it an attractive option for many investors.</p>