What is a mutual fund?
In one line: A mutual fund pools money from many investors to buy a basket of stocks, bonds or both, run by a fund company and priced once a day.
A simple example
Picture 10,000 people each putting in money. The fund company uses the pool to buy hundreds of stocks or bonds. Each person owns a slice, in shares.
Say you put $1,000 into a fund whose NAV (value per share) is $20 at today's close. You get 1,000 ÷ 20 = 50 shares.
If the stocks inside rise and NAV goes to $22, your 50 shares are worth $1,100. If they fall and NAV goes to $18, they're worth $900. Losses are always possible.
How it differs from an ETF
| Mutual fund | ETF | |
|---|---|---|
| When you get a price | Once a day, after the close | All day, like a stock |
| How you buy | Through the fund company or a broker | On an exchange, through a broker |
| Minimum | Some funds set one | Usually the price of 1 share, or less with fractional shares |
Both pool money. Both charge a yearly fee, the Expense ratio.
Why it matters
A mutual fund gives you Diversification in one purchase. Instead of picking 100 stocks, you own a small piece of all of them.
Some are "active," with managers picking investments. Some are Index funds that simply copy an index. Active funds tend to charge more. Our active vs passive investing page compares the two.
A common mistake
Expecting to trade a mutual fund during the day. An order placed at 10 am and one at 3 pm get the same price: that day's closing NAV. Mutual funds suit long-term plans, not quick trades.
Check the fund's fees and any sales charges ("loads") before buying. They're listed in the prospectus.
Questions
Is a mutual fund safe?
It spreads your money across many holdings, which lowers single-company risk. It can still fall in value, sometimes a lot, when its markets fall.
Mutual fund or ETF: which is better?
Neither is better for everyone. ETFs trade all day and often have lower minimums. Mutual funds are handy for automatic monthly investing at some providers.
How do mutual funds make money for the company?
Mainly through the expense ratio, and for some funds, sales charges.
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