Mutual Fund Basics

Mutual funds are the most popular type of investment in the United States. They’re popular because they make investing easy: they provide convenient access to nearly every type of investing market, from stocks to bonds to real estate, from the United States to Europe to Latin America to Asia.

A mutual fund is a type of investment that pools money from a group of investors and then invests that money in a specific set of securities, or investments, such as stocks or bonds. Most mutual funds are sold by banks and investment companies that employ professional fund managers to oversee the fund’s holdings.

Mutual funds are sold in shares, each of which represents a small fraction of the investments owned by the mutual fund. For instance, if a fund owns a basket of different stocks, and you own one share of the mutual fund, you own a fractional share of each of those stocks. When the overall value of the fund’s holdings increases (or decreases), so does the value of the fund shares you own.

To buy mutual funds, you’ll need to open an investment account (for more information on setting up a mutual fund account, see How to Buy Mutual Funds). Once you have an account, you can buy and sell funds yourself by placing orders with the financial institution where your account resides. If you prefer, you can also buy and sell funds through a broker or financial advisor, who acts as an intermediary between you the fund companies that create and market mutual funds.

On the U.S. stock markets, stocks change hands constantly throughout the standard trading day (9:30am–4pm, Monday through Friday). Buying and selling mutual funds works differently. Though you can place orders to buy and sell funds at any time during the trading day, your orders won’t be fulfilled until trading ends at 4pm each day. This delay exists because each mutual fund must tally up the value of its underlying securities—known as the net asset value (NAV)—at the end of each day in order to determine the fund’s share price.