What is a mutual fund?

A mutual fund pools money from many investors to buy a collection of stocks, bonds, or other securities. A professional manager (or index rules) decide what to hold. All investing involves risk, including possible loss of principal.

A mutual fund is a pooled investment vehicle. Many investors contribute money; a fund manager uses that pool to buy a diversified portfolio of stocks, bonds, or other assets. Each investor owns shares of the fund proportional to their contribution, and the fund's net asset value (NAV) — calculated once per day after market close — determines the per-share price. The SEC's mutual fund guide is the authoritative starting point.

Actively managed vs. index mutual funds

Actively managed funds employ a portfolio manager who picks securities in an attempt to outperform the market. This research costs money — active funds typically carry higher expense ratios (annual fees as a percentage of assets). Index funds follow a rules-based index (for example, the S&P 500) with minimal trading and lower fees. Research consistently shows most actively managed funds underperform their benchmark index over long periods after fees, though past performance is not a guarantee of future results.

• Mutual fund NAV is calculated once daily after market close — you can't trade intraday like a stock.
• Expense ratios range from under 0.10% for passive index funds to 1% or more for some active funds.
• Funds may also charge sales loads (front-end or back-end commissions) — 'no-load' funds do not.
• Distributions (dividends and capital gains) may be taxable even if you didn't sell shares.
• All investing involves risk, including possible loss of principal.

What a mutual fund prospectus tells you

Before investing in any mutual fund, you're entitled to a prospectus — a legal document that discloses the fund's investment objectives, strategy, fees, risks, and historical performance. The SEC requires all funds to provide a prospectus. Reading the fee table and risk factors section before investing is one of the most important steps a new investor can take. This page is educational only and does not constitute investment advice.

What the SEC says about mutual funds

• Mutual funds must provide investors with a prospectus disclosing the fund's investment objectives, risks, fees, and expenses, before or at the time of purchase. — SEC / Investor.gov
• The expense ratio of a mutual fund is the annual fee — expressed as a percentage of average net assets — that covers the fund's operating costs. — SEC / Investor.gov
• Mutual fund shares are priced at the net asset value (NAV) calculated once per business day after market close — unlike ETF shares, which trade throughout the day. — SEC / Investor.gov

Key takeaways

• Mutual funds pool money from many investors to buy a diversified basket of securities.
• NAV is calculated once daily — you can't buy or sell intraday like a stock or ETF.
• Expense ratios and sales loads reduce your net return; compare fees before investing.
• Index mutual funds typically carry lower costs than actively managed funds.
• All investing involves risk, including possible loss of principal — read the prospectus before you invest.

Related

• What is an index fund?
• What is an ETF?
• What is a stock?
• What is compound interest?
• What is a Roth IRA?