Investing Basics · definition
Mutual Fund
A mutual fund pools money from many investors into one professionally managed portfolio. Orders execute once a day at the fund's net asset value.
A mutual fund pools money from many investors and invests it as one portfolio according to a stated mandate, run by a professional manager. Investors own shares of the fund rather than the underlying holdings, and buy or sell those shares directly with the fund company once a day.
Key takeaways
- Mutual fund orders execute at the next calculated net asset value (NAV), once per trading day.
- Funds are either actively managed (trying to beat a benchmark) or index funds (trying to match one).
- Costs come as an expense ratio, sometimes plus sales loads; costs compound against returns over time.
- In the US, mutual funds are regulated under the Investment Company Act of 1940, with daily disclosure and custody rules.
NAV: one price per day
At each market close the fund values everything it owns, subtracts liabilities and divides by shares outstanding: that is the NAV, and every buy or sell order from that day executes at it. There is no intraday trading and no bid-ask spread, which distinguishes the wrapper from the ETF.
Mutual fund versus ETF
| Mutual fund | ETF | |
|---|---|---|
| Trading | Once daily at NAV | All day at market prices |
| Minimums | Often a fixed minimum | One share (or a fraction) |
| Holdings disclosure | Monthly or quarterly | Mostly daily |
| US tax efficiency | Capital-gain distributions possible | Usually fewer distributions |
| Automatic investing | Widely supported | Broker-dependent |
Both wrappers can hold the same strategies; the table describes plumbing, not quality.
Costs, the persistent variable
The expense ratio is deducted from fund assets every year regardless of performance. Industry averages have fallen for decades (asset-weighted US equity fund fees dropped roughly by half between 2004 and 2024, per ICI data), driven by the shift to indexing. Some share classes add sales loads (entry or exit charges) or distribution fees; the fee table in a fund's prospectus lists them all. Research consistently identifies costs as one of the strongest predictors of relative fund performance, which is a statement about averages, not a product recommendation.
Frequently asked questions
Are mutual funds safe?
The wrapper provides legal protections (segregated custody, regulation, disclosure), but the investments inside carry full market risk. A stock fund falls when stocks fall.
What is a capital-gain distribution?
When a fund sells holdings at a profit, US funds must pass the gains to shareholders annually, taxable in the year received even if reinvested, one reason taxable investors compare wrappers; see capital gain.
Sources
This entry is for education only. Investing Value describes how financial concepts work; it does not provide investment, tax or legal advice, and nothing here is a recommendation to buy or sell any asset.