What is a mutual fund?

A mutual fund is correctly defined as a pool of savings invested in financial assets. This investment vehicle allows multiple investors to contribute their money, which is then collectively managed by a professional fund manager. The purpose of a mutual fund is to diversify investments across a wide array of financial assets such as stocks, bonds, or other securities, which can help reduce risk and maximize return potential for investors.

Investors buy shares in the mutual fund, and their capital is combined to purchase a diversified portfolio. This structure provides an accessible way for individuals to invest, as it usually requires a lower initial investment compared to directly purchasing shares of individual stocks or bonds.

The other options do not correctly describe a mutual fund. Life insurance is focused on providing financial protection for beneficiaries, a savings account is typically offered by banks with fixed interest rates, and a loan to small businesses involves lending money rather than pooling and investing it in various financial markets. Hence, the definition of a mutual fund as a pool of savings invested in financial assets encompasses its purpose and function in the financial ecosystem.