MUTUAL FUND

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What Is a Mutual Fund?

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

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Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.

Key Takeaways

  • A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities.
  • Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.
  • Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.

Understanding Mutual Funds

Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio's value.

The price of a mutual fund unit is referred to as the net asset value (NAV). A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of units outstanding. Mutual fund units can typically be purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—doesn't fluctuate during market hours, but is settled at the end of each trading day.