Think of the two terms “Mutual” and “Fund.” What a mutual fund is, actually goes hand in hand with its name. A Mutual Fund gives you the investor, a broader basket to select from when investing compared to buying stock of one individual company. A Mutual Fund is defined as a pooled investment vehicle. Meaning it is a pool of money collected from individual investors and is put towards buying a basket of securities. Instead of you the individual investor, purchasing an individual companies’ stock, a Mutual Fund is ran by an Investment Professional, also known as the Portfolio Manager.
What does a Portfolio Manager do?
A Portfolio Manager is a person or a group of people responsible for your investment portfolio. They implement the investment strategy of your portfolio and also manage day-to-day trading in the portfolio. When looking at a Mutual Fund, it is even more important to look at the Portfolio Manager or Managers responsible for operating the fund. They have a great influence on a fund, as they handle all actions regarding the fund. Portfolio Managers are experienced investors and have strong backgrounds in the financial industry and each Portfolio Manager will come with a track record. A track record is their performance of any fund they have managed and will ultimately tell you how good the manager really is at managing money.
How the Price of a Mutual Fund is Calculated
Mutual Funds are relatively transparent. By searching online, you can find out the individual securities a Mutual Fund holds. Now, finding out the price of a Mutual Fund is different than the clear price of a stock. The easiest way to find out the price of a Mutual Fund is to calculate its Net Asset Value (NAV). The NAV of a mutual fund is calculated daily. The price of a Mutual Fund is rapidly changing as the stocks inside the Mutual Fund change throughout the trading day as well. Unlike stocks and ETFs, mutual funds trade only once per day and it is after the markets close at 4:00 p.m. ET. At the end of the day is when the NAV of the fund is calculated and then set at a price where investors buy and sell the fund. While the price of a Mutual Fund is easy to calculate, you truly don’t know the exact price in which you would buy or sell the fund at. You will find out the next day what you bought or sold the Mutual Fund for, after the NAV is calculated from the previous days market close.
Expense Ratios of Mutual Funds:
To put it simple, an expense ratio is the price of which you the investor would pay the Portfolio Manager of the Mutual Fund, for his or her services. This expense ratio covers the funds total annual operating expenses. It is expressed as a percentage of a funds average net assets. The expense ratio will always be found in the “Fund’s Prospectus.” The Prospectus is a document detailing the investment objectives and strategies of a particular fund, and will also include the fund’s past performance, Portfolio Managers and any important financial information, including the Fund’s expense ratio.
Different types of Mutual Funds:
There are a number of different mutual funds, as I have mostly only touched on Equity based Mutual Funds. There are also Money Market Funds, which invest in short-term fixed income securities such as government bonds, treasury bills, etc. There are Fixed Income Funds that can include high-yield corporate bonds. Also, equity funds which are mutual funds that invest in stocks. Balanced Funds, which invest in a mix of equities and fixed income securities. And lastly of the more popular funds is Index Funds, which are funds that aim to track the performance of a specific index like the S&P 500 Index.