Glossary
Mutual fund
A pooled investment that buys a portfolio of securities and is bought and sold at its net asset value once a day.
A mutual fund pools money from many investors and invests it in a portfolio of stocks, bonds or other securities run by a professional manager or set to track an index. Each share represents a slice of that portfolio. Mutual funds give small investors instant diversification and professional management, and they hold a large share of US retirement savings through 401(k) plans and IRAs.
How buying and selling works
A mutual fund is an open-end fund: it issues new shares when investors buy and redeems shares when they sell, directly with the fund rather than on an exchange. All orders are priced at the fund's net asset value (NAV), calculated once a day after the market closes, usually at 4:00 p.m. ET. An order placed before the cutoff gets that day's NAV; one placed after gets the next day's. This is called forward pricing, and it means you never know the exact price when you place the order.
Costs and tax points
Beyond the expense ratio, some funds charge sales loads (a front-end load on purchases or a deferred charge on sales) and 12b-1 fees for marketing. Funds must distribute realized capital gains each year, so holders in taxable accounts can owe tax even if they sold nothing. Many funds also set minimum initial investments. Exchange-traded funds offer similar portfolios but trade throughout the day on an exchange.