Mutual Fund
What is Mutual Fund?
A mutual fund pools money from many investors to buy a professionally managed portfolio of stocks, bonds, or other assets.
Investors buy shares of the fund and own a slice of everything it holds, getting diversification without picking securities themselves. Unlike ETFs, mutual fund shares trade only once a day at the closing net asset value, and actively managed funds charge higher fees than passive index funds.
Mutual Fund: a worked example
Meridian Growth Fund ends the day holding stocks worth $48,000,000 plus $2,000,000 in cash, and owes $500,000 in accrued fees. Net assets are $48,000,000 plus $2,000,000 minus $500,000, or $49,500,000. With 2,200,000 shares outstanding, net asset value per share is $49,500,000 divided by 2,200,000, or $22.50. Every order placed at any point during that day fills at $22.50, not at the price when it was submitted. An investor who sent in $9,000 that morning therefore receives $9,000 divided by $22.50, which is 400 shares.
The mistake students make with mutual fund
A fund quoted at $12 gets read as cheaper than one quoted at $60, the way a low-priced stock looks cheap. Net asset value per share is only net assets divided by shares outstanding, and the fund issues new shares at that value on demand, so no discount is hiding in the small number. Two funds holding identical portfolios can quote $12 and $60 purely because one launched earlier or split its shares. What actually differs is the expense ratio, the turnover, and the holdings.
Mutual Fund questions
What is net asset value (NAV) in a mutual fund?
Net asset value is a mutual fund's holdings minus its liabilities, divided by the number of shares outstanding. It is struck once per trading day after markets close, and every buy and sell order received during that day settles at that single price. Unlike a stock, a mutual fund share has no separate market price bid around by traders, because the fund itself issues and redeems shares at net asset value.
What fees do mutual funds charge?
Mutual funds charge an annual expense ratio deducted from fund assets, and some add a sales load, a one-off percentage taken when you buy or when you sell. A fund with a 1% expense ratio holding $8,000 of your money costs $80 a year, taken from the fund rather than billed, so it never appears on a statement as a charge. Marketing fees and trading costs sit on top, which is why the headline ratio understates the total.
How do you make money from a mutual fund?
A mutual fund returns money to investors in three ways: dividends and interest thrown off by the holdings, capital-gain distributions when the manager sells positions at a profit, and the rise in net asset value of the shares you still hold. The first two are paid out and are often reinvested automatically. Only the third is unrealized, which is why a fund's total return counts distributions alongside the change in net asset value.
Related terms
Common comparisons
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