Mutual Fund Definition

• A mutual fund is an investment vehicle that pools capital from multiple investors to invest in various securities. Investors buy shares in mutual funds just as they would in a single stock. Some funds also charge a fee to invest. Stocks are the most common security held by mutual funds, but many funds buy bonds as well.
  
  

Mutual Funds & Bonds

• The percentage of a mutual fund that consists of bonds varies with the objective of the fund. Many funds primarily hold stocks and allocate a smaller portion to bonds. Mutual funds that aim for aggressive growth generally avoid bonds or only hold a small percentage of the fund in bonds. More conservative funds generally hold bonds as a higher percentage of the fund.
  
  

Bond Funds

• Mutual funds that invest heavily or even solely in bonds are referred to as bond funds. The primary goal of these funds is to provide fixed-income profits to investors through interest. However, these funds are not risk-free because bond prices fluctuate. Credit risk and interest-rate risk also are important factors to consider. Bond funds may choose to sell some of their holdings to buy other bonds, but they cannot short the bond market.
  
  

Restrictions

• As mentioned, there are no prohibitions against mutual funds investing in bonds. However, mutual funds are restricted from short selling. Short selling is the practice of betting that the price of a security will fall. Hedge funds are allowed to short sell, and this is one of the main differences between mutual funds and hedge funds.