There are two questions I am frequently asked when it comes to investing. The first is a general question while the second pertains more to the recent economy and stock market turmoil.
Q: What exactly is a mutual fund?
A: A mutual fund is a professionally managed pool of money. Thousands of investors mail money to a fund company and the collective amount is overseen by a Portfolio Manager. There job is to follow the mutual fund(s) stated objective and purchase stocks, bonds, money market instruments and/or other securities instruments to create a diversified portfolio.
Q: Can I lose all of my money?
A: A mutual fund portfolio consists of hundreds of stocks. To go out of business, a fund would have to witness each and every company in their portfolio file bankruptcy. Should your portfolio own 200 stocks such as Proctor & Gamble, IBM, Verizon, Disney and Exxon Mobile, these companies along with the other 95 holdings would have to go out of business in order for you to lose all of your money.
The best example may pertain to Massachussets Investors Trust Fund (MITTX). Considered to be "America's First Mutual Fund", this equity offering has been in existence since 1924. Not only has it survived the Great Depression, 15 recessions and 6 major wars, it has never missed a dividend payment in it's 85 year history. Through 3/31/09, the fund sports an annualized return of 8.56%. A $1,000 investment in 1924 would now be worth $1,076,307.