Funds use shareholder money to buy assets. The stocks or bonds a fund holds comprise its portfolio , and the financial professional who decides what to buy and sell is the portfolio manager . Every day the fund's accountants calculate the value of each share. This is done by totaling up the value of all assets in the fund's portfolio and dividing that figure by the number of fund shares outstanding. This small percentage, however, is enough to be profitable for the fund company, since so many people are investing so much money.
Bond funds hold only bonds.
As with stock funds, they can be designed to purchase particular grades of bonds. Balanced funds invest in a mix of stocks and bonds. Money market funds stick with safe, short-term debt instruments such as commercial paper, banker's acceptances, repurchase agreements and certificates of deposit. Because they have low risk, they typically provide the lowest returns among mutual funds. Their main uses are to park money between investments, hold emergency savings and to save for short-term goals.