A mutual fund is a type of collective investment scheme that is managed professionally, which pools funds from several investors and invests it in stocks, bonds, short term money market instruments, including other securities. Usually, the mutual fund is managed by a fund manager, who is responsible for trading the pooled money constantly. Subsequently, the net proceeds or losses as the case may be, are shared to the investors annually.

Right from the year 1940, the United States have had three fundamental types of investment companies; open-end funds (also recognized as mutual funds in US), unit investment trusts (UITs) as well as closed-end funds. In the rest part of the world this investment type is generically used for different types of collective investment vehicles like unit trusts, open-ended investment companies, unitized insurance funds as well as transferable securities.

Mutual funds can invest in different kinds of securities; the commonest among them is cash instruments, bonds, stock. However, there are countless sub-categories. For instance, stock funds can invest mainly in the shares of a specific industry like technology or utilities; these are recognized as sector funds. Based on risk, bond funds can vary – for example, investment-grade corporate bonds or high-yield junk bonds. They can also vary according to type of issuers (for instance, government agencies, municipalities or corporations) or maturity of the bonds (short or long term). Stock as well as bond funds can invest in U.S. securities primarily, U.S as well as foreign securities, or primarily foreign securities.

A good number of mutual funds’ investment portfolios are adjusted continually under the supervision of a professional manager, who predicts cash flow to and from the fund by investors, including the future performance of investments suitable for the fund and decides those which are believed  will be very closely suitable for the fund’s stated investment aim. This type of investment is administered under an advisory contract with a management company, who could employ or discharge fund managers.

The investment type under discussion is subject to a unique set of regulatory, tax and accounting rules. In the United States, contrary to many other types of business entities, there is no taxation on their income provided that 90% of it is distributed to their shareholders and that the fund measures up to some diversification requirements in the Internal Revenue Code. Again, the income type they generate is frequently unchanged as it goes through the shareholders.  Mutual fund sharing of tax-free municipal bond income is tax-free to the shareholder. For taxable distributions, they can be ordinary income or capital gains, based on how the fund generated the distributions in question. For net losses, they are not distributed or passed via to fund investors.

Turnover
This is the measure of the fund’s securities transactions, normally calculated more than a year’s time, and normally computed as a percentage of net asset value. It is usually computed as the value of every transaction (both buying and selling), divided by two, divided by the total holdings of the fund. In essence, turnover is used to measure the replacement of holdings.