What is a mutual fund, and how does buying one actually work?
A mutual fund pools many people's money into one portfolio run by a registered adviser. Here is how the price is set, what you pay and what can go wrong.
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Funds and ETFs: owning many investments at once
Funds let many people pool money into one portfolio managed under a written strategy. These notes cover mutual funds, ETFs, index funds, fees and the prospectus.
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Funds let many people pool money into one portfolio managed under a written strategy. These notes explain how mutual funds and exchange-traded funds are structured, what an index fund tracks, how the expense ratio is charged, where ETFs and mutual funds really differ in trading and taxes, and how to find the important parts of a prospectus — the fee table, the objective and the principal risks. Fees get extra attention because they are one of the few things an investor can know in advance. The notes below are listed in reading order: start at the top, or jump straight to the question you have. Every note ends with its numbered sources.
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What is an ETF, and why does its price differ from its value?
An ETF is a pooled fund you buy and sell on a stock exchange like a share. Here is how its market price, its NAV and the costs of trading it fit together.
Read the noteWhat is an index fund, and how does it track the market?
An index fund copies a market index rather than picking winners. Here is how the copying works, why it tends to cost less and where it can fall short.
Read the noteWhat is an expense ratio, and how much does it really cost you?
The expense ratio is the yearly percentage a fund takes from its assets to run itself. It looks tiny, but it compounds. Here is what it covers and what it costs.
Read the noteETF vs mutual fund: what actually differs, and does it matter?
ETFs and mutual funds are both pooled funds. The differences are in how you buy and sell, how the price is set, what trading costs and how taxes tend to work.
Read the noteHow do you read a fund prospectus without getting lost?
Fund prospectuses follow the same order every time. Read the first few pages in sequence — objective, fees, cost example, strategy, risks, performance — and you have most of what matters.
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