How do mutual funds invest your money?

[Barking_Spider]

Lets say for example that I give 5,000 dollars to a certain index mutual fund. This fund invests in the S&P 500.

Does the mutual fund company distribute my money to the S&P companies? Or do they just keep it and notify the corporations that they have the money to invest.

How does this work exactly.

[BobT]

If someone can answer this question simply, they should get the Nobel Prize in Economics (or whatever it’s official name is).

[Just_Ed]

Some good information on index funds at IndexFunds.com (who knew?):

What is an index fund?
An index fund is a mutual fund that mirrors as closely as possible the performance of a stock market index. For example, many mutual fund companies have since established S&P 500 index funds to mirror that index by purchasing all 500 stocks in the same percentages as the index.

So, if you buy shares of an index fund tracking the S&P 500, the fund managers will invest your money in a proportionate number of shares of the companies the index comprises.

See also this article at The Motley Fool.

[Ripple]

I’m a mutual fund accountant for a company that is the custodian for several index funds. AFAIK (other funds may operate differently) incoming money is invested by investment mangers based on the criteria detailed in the prospectus. So if it is an S&P 500 fund, they will invest in S&P 500 securities.

Your $5,000 would basically be used to purchase a wide variety of securities within the index specified, and in compliance with the fund’s prospectus.

As always read the prospectus. You will find the particulars spelled out there, including things like fund mix and involvement in derivatives, etc.

[Duckster]

*Originally posted by Ripple *
I’m a mutual fund accountant for a company that is the custodian for several index funds. AFAIK (other funds may operate differently) incoming money is invested by investment mangers based on the criteria detailed in the prospectus. So if it is an S&P 500 fund, they will invest in S&P 500 securities.

Your $5,000 would basically be used to purchase a wide variety of securities within the index specified, and in compliance with the fund’s prospectus.

As always read the prospectus. You will find the particulars spelled out there, including things like fund mix and involvement in derivatives, etc.

Translation for computer geeks and newbies alike: RTFM