Mutual fund

What It Means

A mutual fund is an SEC-registered investment company that pools money from many investors and puts it into stocks, bonds, money market instruments or other securities. Each share gives you a small piece of everything the fund holds. The shares are redeemable, so you can sell them back to the fund on any business day at the next net assetAssetsThings you own that are worth money, such as cash, investments, a home or a car. Your assets minus your debts is your net worth. See more value (NAV) it calculates, minus any redemption fee.

How People Say It

• "Most of my 401(k) is in two mutual funds."
• "The fund's price only updates after the market closes."
• "What's the expense ratio on that fund?"

The Breakdown

Formula

NAV = total assets minus total liabilitiesLiabilitiesDebts and other money you owe, such as a mortgage, a car loan or a credit card balance. Your assets minus your liabilities is your net worth. See more. NAV per share = NAV ÷ shares outstanding.

Worked example. Investor.gov's example fund holds securities and other assets worth $100 million and has $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more million in liabilities, so its NAV is $90 million. Say it has 4.5 million shares outstanding (our number, for the example).

At $20.00 a share, $1,000 equals 50 shares before any fees.

What the result means. NAV moves every business day as the fund's holdings change in value. Funds generally must calculate it at least once each business day, usually after the major US exchanges close. When you sell shares back, you get the next NAV the fund calculates after your request, minus any redemption fee.

Where It Comes From

The first open-end mutual fund in the US, the Massachusetts Investors Trust, was established on March 21, 1924, and MFS still offers its shares today. After the 1929 crash, many investment trusts and investment companies failed and their shareholders took heavy losses. Congress answered with the Investment Company Act of 1940, which President Franklin D. Roosevelt signed on August 22 that year. The SEC describes it as the principal law regulating investment companies, and mutual funds are covered by it.

Good to Know

Investor.gov says mutual funds aren't guaranteed or insured by the FDIC or any other government agency, and you can lose some or all of the money you invest. Running a fund costs money, and the fund takes those fees and expenses out of its assets, so you pay them indirectly. Fees vary from fund to fund, and even small differences can add up to large differences in returns over time. A fund generally must pay you within seven days after you ask to redeem shares.

Related Terms and Categories

• Index fund

  A mutual fund or ETF that aims to track the return of a market index, such as the S&P 500, instead of picking investments to beat it.

• ETF

  An exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices.

• Expense ratio

  The yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested.

• Money market fund

  A type of mutual fund that invests in cash and short-term, high-quality debt, often aiming for a steady $1.00 share price, with no FDIC insurance.

• Target-date fund

  A mutual fund or ETF that shifts its mix of investments toward more conservative ones as the year in its name, usually a retirement year, gets closer.

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