A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors.
A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
One of the main advantages of mutual funds is they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in the gain or loss of the fund. Mutual funds invest in a wide amount of securities, and performance is usually tracked as the change in the total market cap of the fund, derived by aggregating performance of the underlying investments.
Mutual fund units, or shares, can typically be purchased or redeemed as needed at the fund’s current net asset value (NAV) per share, which is sometimes expressed as NAVPS. A fund’s NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.
Fees Associated With Mutual Funds
When an investor purchases shares in a mutual fund, he is usually assessed a fee known as an expense ratio. A fund’s expense ratio is the summation of its advisory fee or management fee and its administrative costs. Additionally, these fees can be assessed on the front-end or back-end, known as the load of a mutual fund. When a mutual fund has a front-end load, fees are assessed at the time of the initial purchase. For a back-end load, mutual fund fees are assessed when an investor sells his shares.
Sometimes, however, an investment company offers a no-load mutual fund, which is a fund sold without a commission or sales charge. These funds are distributed directly by an investment company rather than through a secondary party.
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Dave Kimbler is a financial advisor with forty-one years’ experience, and has been working in the investment and insurance industry since 1976. Dave focuses primarily on advising and managing assets for Kimbler’s clients.