Investment definition is an asset acquired or invested in to build wealth and save money
from the hard earned income or appreciation. Investment meaning is primarily to obtain an
additional source of income or gain profit from the investment over a specific period of time.
What Is a Mutual Fund?
A mutual fund is a financial vehicle that pools assets from shareholders to
invest in securities like stocks, bonds, money market instruments, and other
assets. Mutual funds are operated by professional money managers, who
allocate the fund's assets and attempt to produce capital gains or income for
the fund's investors. A mutual fund's portfolio is structured and maintained to
match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally
managed portfolios of equities, bonds, and other securities. Each
shareholder, therefore, participates proportionally in the gains or losses of the
fund. Mutual funds invest in a vast number of securities, and performance is
usually tracked as the change in the total market cap of the fund—derived by
the aggregating performance of the underlying investments.1
Most mutual funds are part of larger investment companies such as Fidelity
Investments, Vanguard, T. Rowe Price, and Oppenheimer. A mutual fund has
a fund manager, sometimes called its investment adviser, who is legally
obligated to work in the best interest of mutual fund shareholders.
How Are Mutual Funds Priced?
The value of the mutual fund depends on the performance of the securities in
which it invests. When buying a unit or share of a mutual fund, an investor is
buying the performance of its portfolio or, more precisely, a part of the
portfolio's value. Investing in a share of a mutual fund is different from
investing in shares of stock. Unlike stock, mutual fund shares do not give
their holders any voting rights. A share of a mutual fund represents
investments in many different stocks or other securities.
The price of a mutual fund share is referred to as the net asset value (NAV)
per share, sometimes expressed as NAVPS. A fund's NAV is derived by
dividing the total value of the securities in the portfolio by the total amount of
shares outstanding. Outstanding shares are those held by all shareholders,
institutional investors, and company officers or insiders.
Mutual fund shares can typically be purchased or redeemed at the fund's
current NAV, which doesn't fluctuate during market hours, but is settled at the
end of each trading day. The price of a mutual fund is also updated when the
NAVPS is settled.2
The average mutual fund holds different securities, which means mutual fund
shareholders gain diversification. Consider an investor who buys only Google
stock and relies on the success of the company's earnings. Because all of
their dollars are tied to one company, gains and losses are dependent on the
company's success. However, a mutual fund may hold Google in its portfolio
where the gains and losses of just one stock are offset by gains and losses of
other companies within the fund.
How Are Returns Calculated for Mutual Funds?
When an investor buys Apple stock, they are buying partial ownership or a
share of the company. Similarly, a mutual fund investor is buying partial
ownership of the mutual fund and its assets.
Investors typically earn a return from a mutual fund in three ways, usually on
a quarterly or annual basis:
1. Income is earned from dividends on stocks and interest on bonds held
in the fund's portfolio and pays out nearly all of the income it receives
over the year to fund owners in the form of a distribution. Funds often
give investors a choice either to receive a check for distributions or to
reinvest the earnings to purchase additional shares of the mutual fund.
2. If the fund sells securities that have increased in price, the fund realizes
a capital gain, which most funds also pass on to investors in a
3. When the fund's shares increase in price, you can then sell your mutual
fund shares for a profit in the market.3
When researching the returns of a mutual fund, an investor will see "total
return," or the change in value, either up or down, of an investment over a
specific period. This includes any interest, dividends, or capital gains the fund
generated as well as the change in its market value over some time. In most
cases, total returns are calculated for one, five, and 10-year periods as well
as since the day the fund opened, or the inception date.4