Mutual Fund
A mutual fund pools money from many investors and invests it in a portfolio of stocks, bonds or other assets run by a professional manager. Shares are bought from and sold back to the fund at its net asset value, calculated once a day.
Mutual funds were the main way ordinary people invested in markets for most of the last century, and they still hold trillions of dollars. Instead of picking individual stocks, you buy a share of a ready-made portfolio. This entry explains how a mutual fund works, how its price (NAV) is set, what you pay for it, and how it differs from an ETF.
- Category
- Trading Basics
- Reading time
- 4 min
- Also called
- Mutual funds, Open-end fund, Unit trust
- Updated
Mutual funds in plain words
A mutual fund is a registered investment company that pools money from many investors; its combined holdings form a portfolio run by a registered investment adviser.1
Each share represents part ownership of that portfolio and of the gains and losses it produces.1
You buy shares from the fund and sell them back to the fund, rather than trading them with other investors on an exchange.1
How a mutual fund works, step by step
Investors send money
Money from many people is pooled into one fund.
The manager invests it
Following the fund's stated strategy. See Portfolio.
NAV is calculated
Assets minus liabilities, divided by shares, each business day.
Orders fill at NAV
Buy and sell orders placed during the day get that day's price.
Fees are taken
An expense ratio and sometimes sales loads. See Expense Ratio.
Gains are distributed
Dividends and capital gains are paid out or reinvested.
Worked examples
Example 1 — Calculating NAV
$10 per shareA fund holds $100 million of assets and owes $10 million. Investors own 9 million shares.
| Net asset value | $100m − $10m = $90m |
| NAV per share | $90m ÷ 9m = $10 |
NAV is total assets minus liabilities; per-share NAV divides it by the shares outstanding.2
Example 2 — Buying shares
+$400You invest $5,000 in a fund with a NAV of $25 and no sales load.
| Shares received | $5,000 ÷ $25 = 200 |
| Value if NAV rises to $27 | 200 × $27 = $5,400 |
The price paid for mutual fund shares is roughly the per-share NAV plus any purchase fees.2
Example 3 — The cost of fees
≈ $1,580 lost to fees$10,000 grows 7% a year for 10 years, with a 1% versus a 0.1% expense ratio.
| Net 6% a year | $10,000 × 1.06^10 ≈ $17,908 |
| Net 6.9% a year | $10,000 × 1.069^10 ≈ $19,488 |
| Fee drag | ≈ $1,580 |
Over time, higher fees and expenses can significantly lower investment returns.3
Mutual fund vs ETF
| Aspect | Mutual fund | ETF |
|---|---|---|
| Where you trade | With the fund | On an exchange |
| Price | Once a day at NAV | Throughout the day |
| Minimum investment | Often set by the fund | One share |
| Strategy | Active or passive | Active or passive |
Why people use mutual funds
Instant diversification
One purchase buys many companies or bonds. See Diversification.
Professional management
An adviser picks and monitors the holdings.
Retirement plans
Many workplace plans offer mainly mutual funds.
Regular investing
Low minimums suit monthly contributions. See Dollar-Cost Averaging.
Advantages and disadvantages
Advantages
- Diversification in a single purchase.
- Professional management.
- Low minimums for many funds.
Disadvantages
- Fees can be high, especially for active funds.
- Only one price per day.
- Capital gains distributions can create tax bills.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why people choose them
Beginner
Investors pick mutual funds for professional management, diversification across many companies and industries, and low minimums for initial and later purchases.1
Active and passive funds
Intermediate
Both mutual funds and ETFs can follow a passive strategy that tracks an index or an active one where the adviser picks investments freely; passive funds are usually called index funds.4 See Index Fund.
Daily pricing
Advanced
Mutual funds generally must calculate NAV at least once every business day, typically after the major US exchanges close, so every order that day gets the same price.2
Common mistakes
Ignoring the expense ratio
Small yearly fees compound into large sums.
Chasing last year's winner
Past performance rarely repeats.
Owning overlapping funds
Several funds may hold the same stocks.
Forgetting tax distributions
Funds can pay out taxable gains even in a bad year.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A mutual fund pools many investors' money into one portfolio.
- Shares are bought from and sold back to the fund.
- The price is the NAV, set once a day.
- Fees matter a lot over time.
- Funds can be active or passive.
Frequently asked questions
Can you lose money in a mutual fund?
Is a mutual fund better than an ETF?
What is a sales load?
Further learning
- Exchange-Traded Fund
The exchange-traded alternative.
- Index Fund
The low-cost passive version.
- Diversification
The main benefit of pooling.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Mutual Funds (opens in a new tab) Checked .
- Investor.gov (SEC). Net Asset Value (opens in a new tab) Checked .
- Investor.gov (SEC). Index Fund (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Characteristics of Mutual Funds and Exchange-Traded Funds (ETFs) – Investor Bulletin (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.