What is a mutual fund?

A mutual fund is essentially a pooled investment vehicle that collects money from various investors to create a diversified portfolio of financial securities such as stocks, bonds, or other assets. This pooling of resources allows investors to benefit from diversification, which helps reduce risk, as the fund spreads investments across a wide array of asset classes, industries, and geographies.

The management of the mutual fund is handled by professional fund managers who make investment decisions on behalf of the investors. This professional oversight is particularly appealing to individuals who may not have the time or expertise to manage their own investments effectively.

In contrast, a single stock investment focuses on ownership of a single company's shares, which carries more risk and less diversification. A type of bond is a fixed income investment, whereas a retirement savings account is designed specifically for saving for retirement, offering tax advantages and specific regulatory rules. None of these alternatives encapsulate the broad, diverse, and professionally managed nature of a mutual fund, which is why the choice accurately reflects the definition of a mutual fund.