What is a Mutual Fund?

A mutual fund is a pooled investment vehicle. It collects money from many investors and uses that combined pool to buy a portfolio of stocks, bonds, or other assets. Each investor owns a share of the fund proportional to how much they put in.

How does a mutual fund work in practice?

You invest a sum of money into the fund. A professional fund manager or a team of managers decides which assets to buy and sell inside the fund. The value of your investment rises and falls based on how those underlying assets perform. At the end of each trading day the fund calculates its net asset value, and that is the price at which shares are bought and sold.

Who manages a mutual fund?

Most mutual funds are actively managed, meaning a professional manager makes ongoing decisions about what to buy and sell in an attempt to outperform the market. Some mutual funds are passively managed and simply track an index, similar to an ETF.

What are the advantages?

Mutual funds offer diversification, professional management, and accessibility. Many allow you to invest with relatively small amounts and to set up automatic regular contributions. They are a common vehicle for retirement savings in many countries.

What are the drawbacks?

Actively managed mutual funds tend to charge higher fees than ETFs. These fees are paid regardless of whether the fund outperforms the market or not. Research consistently shows that the majority of actively managed funds fail to beat their benchmark index over the long term, particularly after fees are accounted for.