A:

There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors that determine the amount of a company a mutual fund can own: the rules of a mutual fund and the fund's objectives.

A fund's prospectus usually dictates theamount of a company's stock that a mutual fund owns. Mutual funds usually have set rules and restrictions that dictate the amount of a company's stock that a mutual fund manager can buy for the portfolio. If the rules and restriction of the mutual fund sets the limit at 10%, then a mutual fund manager may only purchase up to 10% of a company's stock. In the event that the mutual fund does not have a set rule, the mutual fund manager has to make a judgement about the amount of stocks to buy. However, due to the risky nature of stocks, the mutual fund manager has to make sure that he/she chooses a conservative percentage of stocks.

Another factor that determines the amount of company stocks a mutual fund can own is the objective of the fund. If a mutual fund is an aggressive growth fund or a growth income fund, then that fund is going to own more stocks than a mutual fund that is a bond fund or a money market fund.

To learn more, see Picking The Right Mutual Fund.

This question was answered by Chizoba Morah.

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