What is a mutual fund?

Introduction

Mutual funds have historically been the most popular way that U.S. investors pooled their money to make investments, as explained in our article investment fund types. There are currently 30,262 mutual funds in our database, offered by 497 companies. See our list of companies that offer mutual funds. Our database should be fairly complete as our database is updated nightly using a data feed from NASDAQ.

Mutual fund shares are not traded on a stock exchange. Instead, an investor buys and sells shares in a mutual fund by directly interacting with the mutual fund company. Or an investor can buy shares in a mutual fund through a broker, who helps coordinate the transaction on the investor's behalf. You buy mutual funds at the fund's end of day net asset value, or "NAV" - the value of all of its investments, less expenses. Mutual fund shares are redeemable you can sell your mutual funds at the current NAV less any fees and charges for redemption. The fund's net asset value is calculated daily, at the end of the day.

Because mutual funds are constantly issuing additional shares to new investors and redeeming shares from existing investors, mutual funds are sometimes referred to as "open-end" funds, because the total number of outstanding shares of the fund is "open-ended". This is in contrast to closed-end funds, another major investment fund type in the U.S. - see what is a closed-end fund?

Many mutual funds will charge you an upfront fee at the time you purchase shares in the mutual fund, and a redemption fee at the time you redeem your shares in the mutual fund. These fees are on top of the regular ongoing management fees of the fund. So like any investment, it is important to study a mutual fund's prospectus up front to understand the fees involved, which can be significant.

Active versus Passive Management

Most mutual funds are "actively managed" mutual funds, where investment decisions are made by a portfolio manager. Typically, a mutual fund has a set of investment policies that the portfolio manager must adhere to, but these policies can be either very broad or very narrow. So every mutual fund is different as to how much discretion the portfolio manager has to make investments.

There are some mutual funds that are "index funds" - they track an index rather than having the investment decisions made by a portfolio manager. Over the past ten to fifteen years, index investing has exploded in popularity, and exchange traded funds ("ETFs"), which primarily track an index, have also exploded in popularity. But there are also hundreds of large index mutual funds that are massive in size and track all the most popular stock market indexes.

Here is a summary of the investing styles of the mutual funds in our database:

Investment StyleFund Count
Actively managed29,168
Follows a set investment pattern9
Passively tracks an index1,085
Total30,262

Share Classes

One feature that is unique to mutual funds is that mutual funds have "share classes". As mentioned above, we have 30,262 mutual fund symbols in our database. But that number is somewhat misleading. There are actually only about 10,000 mutual funds, because most mutual funds have multiple classes of stock in the fund. Each class of stock is given a unique ticker symbol.

Why are there different share classes? The different share classes are designed so that the mutual fund company can charge different fees to different types of investors. Mutual funds often include all kinds of rules about when and how you can invest in them, such as a minimum investment requirement, or a rule as to what type of investor is allowed to purchase the fund. And they often charge different types of fees when you buy or sell shares in a fund. All the rules and fees are different for each different share class in a fund.

Let's look at an example. AGTHX is the symbol for the class A shares of the The Growth Fund of America. If you click here to analyze this fund, and you click on the "Other Class Symbols" tab, you will see that The Growth Fund of America actually has 19 share classes. Because the rules and fees for each share class are different, the performance of each share class is different (i.e. higher fees equals less returns). That's why each share class has to have its own symbol. Most funds don't have 19 share classes, but many have 5-10 share classes.

Over the past few years, exchange traded funds have started to become more and more popular with investors, who are increasingly favoring ETFs over mutual funds. There are lots of reasons why, but probably one small reason is that the share class system of mutual funds creates too much unnecessary complexity.

Mutual Funds Dominate Retirement Accounts

ETFs have grown in popularity during the past twenty years, but mutual funds continue to dominate most retirement accounts like corporate 401k plans and pension plans. One thing to watch over the next ten years is whether ETFs will start to be used more by corporate retirement accounts.

Key Attributes

Here are the key attributes of a mutual fund that you need to memorize or have a clear understanding of:


All data is a live query from our database. The wording was last updated: 05/08/2020.

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