What Is a Mutual Fund?

When an investor buys shares in a mutual fund, they are buying partial ownership of the mutual fund company as well as its assets. This means that each share represents an investor’s part ownership in the fund and the income it generates. The combined holdings of the mutual fund are known as its portfolio. 

Net Asset Value (NAV)

The price of the mutual fund is known as its net asset value (NAV). The NAV is determined by dividing the total value of the securities in the portfolio by the total amount of shares outstanding. Outstanding shares are those held by all shareholders. This price fluctuates based on the value of the securities held by the portfolio at the end of each business day. 

Fees

Mutual funds come with fees, which can vary greatly from fund to fund. The 2 most common mutual fund fees are expense ratios and load fees. Expense ratios are the annual operating expenses for owning the mutual fund, and load fees are the sales and commission charges for buying and selling the mutual fund. However, not all mutual funds charge load fees — funds that don’t charge load fees are called no-load mutual funds. Some funds also charge fees and penalties for early withdrawals or selling the holding before a specific time has elapsed.

Active vs. Passive Mutual Funds

A mutual fund’s fees will also depend on whether it’s actively or passively managed. Actively managed funds have a professional manager or management team making all the decisions about how to invest the fund’s money — they aim to beat the market. Due to the active involvement of professionals, actively managed mutual funds are more expensive to own. Passively managed funds, on the other hand, typically still have fund managers, but their focus is to fund investments that align with a specific index (such as the S&P 500). Since there’s less work involved for fund managers, passively managed index funds are cheaper to own.