Quick answer
A mutual fund is an SEC-registered investment company that pools money from many investors and buys a portfolio of stocks, bonds or other assets. You buy and sell shares with the fund itself at the next calculated net asset value (NAV), usually set once per business day [1].
Key points
- A mutual fund pools many investors' money into one professionally managed portfolio.
- You trade with the fund itself, at the NAV calculated after your order — not at a price you see during the day.
- NAV per share is the fund's assets minus its liabilities, divided by the shares outstanding.
- The same fund can come in share classes (A, C and others) that charge the same portfolio in different ways.
- Mutual funds are not insured by the FDIC; their value can fall.
#What does a mutual fund actually do?
A mutual fund collects money from many people and invests it as one pot. Investor.gov, the investor education site of the U.S. Securities and Exchange Commission (SEC), defines it as "an SEC-registered open-end investment company that pools money from many investors" [1]. The SEC's guide adds that the pot can hold stocks, bonds, short-term money-market instruments, other securities, or a mix [2].
"Open-end" means the fund keeps issuing new shares when people put money in and buys shares back when people leave. Each share you own is a proportional claim on the whole portfolio. If the fund holds 400 different companies, your one purchase gives you a small piece of all 400. That spreading of money is the idea behind diversification.
A professional manager runs the portfolio. The SEC notes that most funds are managed by investment advisers registered with the SEC [2]. You do not pick the individual holdings; you pick the fund, and the fund's written strategy decides what goes in.
How money moves through a mutual fund
#What is NAV and how is a mutual fund priced?
Net asset value (NAV) is what the fund owns minus what it owes. Investor.gov defines it as "the company's total assets minus its total liabilities" [3]. Divide that by the number of shares outstanding and you get the NAV per share, the number you will see quoted for a fund. Our glossary entry on net asset value covers the term in more depth.
Timing matters. Mutual funds generally must calculate NAV at least once every business day, typically after the major U.S. exchanges close [3]. They must sell and redeem shares at the NAV calculated after your order is placed — a rule known as forward pricing [2]. So if you place an order at 11 a.m., you do not know your exact price until that evening.
Worked example
Working out NAV per share
A hypothetical fund holds $500,000,000 of investments and cash and owes $5,000,000 in expenses and other liabilities. It has 20,000,000 shares outstanding.
- Net assets ($500,000,000 − $5,000,000)
- $495,000,000
- NAV per share ($495,000,000 ÷ 20,000,000)
- $24.75
- Shares bought with $10,000 and no sales charge ($10,000 ÷ $24.75)
- 404.04 shares
Every investor who orders before the cut-off that day gets the same $24.75 price, whether they placed the order in the morning or the afternoon.
Hypothetical numbers for illustration, calculated in Python. Real funds publish their NAV each business day.
#How do you buy and sell mutual fund shares?
Investors buy and sell mutual fund shares from or to the fund itself, or through a broker or investment adviser — not from or to other investors on a stock exchange [1]. That is the main mechanical difference from an exchange-traded fund, which trades on an exchange during the day.
Shares are redeemable: you can sell them back to the fund on any business day at the next calculated NAV, minus any fees charged at redemption [1]. Some funds require a minimum amount to open an account. The SEC lists low minimums among the reasons people use funds, along with professional management, diversification and liquidity [2].
#What are mutual fund share classes?
Many funds sell the same portfolio in several share classes. The investments are identical; what changes is how you pay for distribution and advice. The SEC's bulletin on fund classes explains that Class A shares might charge a front-end sales load, while Class C shares might have a 12b-1 fee and a contingent deferred sales load for some period, often a year [4]. It also notes that Class B shares "are no longer widely available" [4].
| Class | When you pay a sales charge | Ongoing 12b-1 fee | What to watch |
|---|---|---|---|
| Class A | Up front, as a % of the purchase (front-end load); may drop at larger amounts (breakpoints) | Generally lower than other load classes | The load cuts the amount invested on day one |
| Class B | On sale (contingent deferred sales load), shrinking over time | Higher | No longer widely available |
| Class C | Often a deferred load for about a year | Generally higher than other load classes | Higher yearly fee adds up if you hold for a long time |
| No-load | None | Check the fee table | Purchase, redemption or account fees can still apply |
#What is a sales load?
A sales load is a sales charge, usually paid to the salesperson or firm that sold you the fund. FINRA, the U.S. brokerage regulator, describes a front-end load as a commission paid at purchase that "can range between 2 percent and 5 percent" [5]. A back-end load is paid only if you sell during the period the charge applies [5]. The amounts at which a front-end load drops for bigger purchases are called breakpoints, and your investment firm must tell you what they are [5].
Worked example
What a 5% front-end load does to $10,000
You invest $10,000 in Class A shares of the hypothetical fund above (NAV $24.75) with a 5% front-end load, and compare it with a share class that has no load.
- Sales load ($10,000 × 5%)
- $500
- Amount actually invested ($10,000 − $500)
- $9,500
- Class A shares bought ($9,500 ÷ $24.75)
- 383.84 shares
- No-load shares bought ($10,000 ÷ $24.75)
- 404.04 shares
On day one, the Class A investor's holding is worth $9,500 if NAV does not move. The load is paid once; ongoing costs come on top.
Hypothetical figures calculated in Python. Class A shares often carry lower yearly costs than Class C, so the full comparison depends on how long you hold. See expense ratios and fund fees.
#What are the risks of owning a mutual fund?
Investor.gov states plainly that mutual funds "are not guaranteed or insured by the FDIC or any other government agency" [1], and the SEC adds that this holds even if you buy through a bank and the fund carries the bank's name [2]. A stock fund rises and falls with the stocks it holds; a bond fund is exposed to interest rates and credit risk.
The SEC also lists drawbacks: you pay fees regardless of how the fund performs, you cannot control which securities the fund holds, and you face price uncertainty because NAV may not be calculated until many hours after your order [2].
Common beginner mistakes
Assuming a bank-sold fund is insured
A fund bought at a bank branch is still an investment, not a deposit. It is not FDIC insured and can lose value.
Ignoring the share class letter
Two funds with the same name can cost very different amounts. Check the class (A, C, I and so on) and its fee line before you buy.
Expecting the price you see at noon
Mutual fund orders fill at the next NAV, usually set after the market closes. The price you saw earlier in the day is yesterday's NAV.
Missing breakpoint discounts
If you pay a front-end load, larger or combined purchases may qualify for a lower rate. Ask the firm for the breakpoint schedule.
What's the bottom line?
A mutual fund is a simple idea with a few important details: your money joins a large pool, you trade with the fund at the next end-of-day NAV, and the share class you choose decides how you pay for it. Before buying, read the fee table, check the class and remember that the value can go down. Next, compare it with the other common wrapper in ETF vs mutual fund.
Frequently asked questions
Is a mutual fund the same as an index fund?
Not always. An index fund is a mutual fund or ETF that tries to track a market index. Many mutual funds are actively managed instead, meaning a manager picks holdings to try to beat a benchmark. See index funds explained.
How often is a mutual fund's price updated?
Usually once per business day. Funds generally calculate NAV after the major U.S. exchanges close, and orders received before the cut-off get that day's NAV.
Can I lose money in a mutual fund?
Yes. A fund's value moves with its holdings, and mutual funds are not insured by the FDIC or any other government agency.
What is the difference between a load and an expense ratio?
A load is a one-time sales charge paid when you buy or sell. The expense ratio is a yearly cost, taken from fund assets, expressed as a percentage of the fund's average net assets.
Sources
Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.
- U.S. SEC — Investor.gov. Mutual Funds (2026). Accessed 2026-10-03.A
- U.S. Securities and Exchange Commission. Mutual Funds and ETFs: A Guide for Investors (2016). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Net Asset Value (glossary) (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Updated Investor Bulletin: Mutual Fund Classes (2021). Accessed 2026-10-03.A
- FINRA. Mutual Funds (2026). Accessed 2026-10-03.A
This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.
