Investor’s Manual: What Is a Mutual Fund?

Understanding the basics of a mutual fund. This is a brief mutual fund 101 defining what is a mutual fund.

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A mutual fund is a professionally managed financial security that pools assets from multiple investors in order to purchase stocks, bonds, or other securities.

A fund’s investors may range from individual investors’ 401(k) plans and Individual Retirement Accounts (IRAs) to institutions such as pensions and university endowments.

Mutual fund returns come from capital gains and income from the underlying securities of the funds, which are typically stocks and their dividends, bonds and the interest paid on them, and other assets.

Unlike individual stocks, whose prices fluctuate throughout the trading day and can be bought and sold whenever the market is open, mutual funds are priced and settled once a day to what’s called a net asset value (NAV). A fund’s NAV is the per-share market value of all the securities held by the fund, minus any of the fund’s liabilities. Anytime an investor deposits money into the fund or redeems shares from the fund, the transactions are included in the day’s NAV.

Capital gains on fund assets are typically passed on to investors through taxable distributions, generally on an annual basis. If the securities are not sold, a fund typically nets out all the gains and losses on securities bought and sold, then distributes what’s left to fund shareholders on a per-share basis. An investor can choose to take the capital gain or reinvest it in the fund.

For a side-by-side comparison of ETFs and mutual funds, visit this page.

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As with any portfolio investment, you must carefully consider objectives, risks, charges, and expenses when investing in mutual funds. And remember this about mutual funds: You don’t actually own shares of the equities or bonds in the fund; you own a piece of the fund itself. 

TD Ameritrade clients can view our mutual fund screener. Log in to tdameritrade.com, point to  Research & Ideas > Screeners > Mutual Funds to begin a search.

Also, watch the video below to learn more about mutual funds.

Investing Basics: Mutual Funds
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Mutual funds are subject to market, exchange rate, political, credit, interest rate and prepayment risks, which vary depending on the type of mutual fund. Fund purchases may be subject to investment minimums, eligibility, and other  restrictions, as well as charges and expenses.  Certain money market funds may impose liquidity fees and redemption gates in certain circumstances.

A mutual fund is not FDIC-insured, may lose value and is not guaranteed by a bank or other financial institution. 



Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

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