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Mutual Fund: Pooled Investing Priced Once a Day

By Imperialpedia Staff

A mutual fund pools money from many investors and uses it to buy a diversified portfolio of stocks, bonds, or other securities, managed by a professional fund manager or management team. Unlike a stock or ETF, mutual fund shares aren't bought and sold throughout the trading day — every order gets filled at one price, calculated after the market closes.

Net Asset Value and End-of-Day Pricing

A mutual fund's price, called net asset value or NAV, is calculated once daily by adding up the value of everything the fund holds and dividing by the number of outstanding shares. Every investor who places an order during the day, whether at 9am or 3pm, receives the same NAV once it's calculated after the market closes.

Active Management and Its Costs

Many mutual funds are actively managed, meaning a manager makes ongoing decisions about which securities to buy or sell in an attempt to beat a benchmark index. That active oversight typically carries a higher expense ratio than a passive index fund, and decades of data show most active managers fail to beat their benchmark consistently after fees.

Load Fees and Redemption Rules

Some mutual funds charge a load, a sales commission paid when buying or selling shares, on top of the ongoing expense ratio. Funds may also impose minimum holding periods or redemption fees to discourage short-term trading, since large, sudden withdrawals can force a manager to sell holdings at an inopportune time.

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