Money Essentials

Mutual funds explained

What is a mutual fund and how exactly does one invest in them?


Adapted from "The Right Way to Invest in Mutual Funds" and "Investing for the Financially Challenged," both by Money magazine senior editor Walter Updegrave.

A mutual fund pools money together from thousands of small investors and then its manager buys stocks, bonds or other securities with it.

When you contribute money to a fund, you get a stake in all its investments.

That's a big deal: Since most funds allow you to begin investing with as little as a couple thousand dollars, you can attain a diversified portfolio for much less than you could buying individual stocks and bonds. Plus, you don't have to worry about keeping track of dozens of holdings - that's the fund manager's job.

The price for a share of a open-end fund is determined by the net asset value, or NAV, which is the total value of the securities the fund owns divided by the number of fund shares outstanding.

If a mutual fund has a portfolio of stocks and bonds worth $10 million and there are a million fund shares, the NAV would be $10. A fund's NAV changes every day, after the market close, and reflects the price fluctuations of the fund's holdings.

The NAV is the price at which you can buy and sell shares, as long as you don't have to pay a sales commission, or "load." You have to pay a load fee when you buy from a broker, financial planner, insurance agent or other adviser. There are load and no-load funds.

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