Mutual Fund Foundations · Mutual Funds

A mutual fund pools investors' money into one portfolio. Your shares give you an economic interest in that portfolio, while its mandate determines what the manager can own.

Follow the ownership chain

Imagine a fund with $8 million of net assets and 400,000 shares. Each share represents $20 of net asset value. Buying $2,000 at that value gives you 100 shares before any purchase charge. You do not receive a separate trading account containing each underlying security. You own fund shares whose value reflects the portfolio and its liabilities.

Pooling can make a broad collection of investments accessible with a modest contribution. It does not make every fund diversified. A fund devoted to one industry can remain highly concentrated despite holding dozens of securities.

Read the mandate before the name

The investment objective describes what a fund seeks to achieve. Its strategy explains the investments and techniques it may use. A growth objective can be pursued through very different company sizes, regions and levels of concentration. Treat the portfolio as a business process you need to understand, rather than a label promising an outcome.

Separate the wrapper from the investments

This guide uses conventional U.S. registered mutual funds as its main reference. Similar pooled products elsewhere can have different dealing, disclosure and tax rules. The legal structure matters, but it does not replace analysis of the assets. A bond mutual fund and an equity mutual fund share a wrapper while carrying different economic risks.

Write down the job of the fund

Before comparing products, finish this sentence: this fund would help finance a particular goal over a particular period. Then identify the loss you could withstand, the cash you might need and the cost you would accept. A manager can make investment decisions for a portfolio, but cannot decide whether the portfolio fits your circumstances.

Try it yourself

A fund has $12 million of net assets and 600,000 shares. With no purchase charge, how many shares does a $3,000 investment buy?

Show the worked answer

NAV is $20 per share. The investment buys 150 shares. The number of shares alone says nothing about whether the fund is cheap or suitable.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. Fund terms, investor eligibility and tax treatment vary by product, account and jurisdiction.

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