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Mutual fund definition
A mutual fund is a pooled investment vehicle that collects money from many investors and buys a portfolio of financial instruments on their behalf. Each investor owns units in the fund rather than the underlying holdings.
A professional manager invests the pooled money according to the fund's objective, such as capital growth, income, or matching an index. The fund's price is its net asset value (NAV), the total value of holdings divided by the number of units, and it is usually struck once a day.
A mutual fund is one type of pooled fund, and it differs from an exchange-traded fund. A mutual fund is bought and sold at the daily NAV directly with the fund provider, while an exchange-traded fund trades on an exchange throughout the day at a live market price. Both spread money across many holdings, but only the exchange-traded fund prices continuously.
Mutual fund Example
You put USD 5,000 into an equity mutual fund. The fund pools your money with capital from other investors and buys shares in 100 different companies.
Say the fund holds USD 50 million in total. Your stake is:
USD 5,000 √∑ USD 50,000,000 = 0.01%
You own 0.01% of the portfolio through your units, not the 100 shares directly. If the fund's holdings rise to USD 55 million, your stake stays at 0.01%, now worth USD 5,500.
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