Investing 101
What Is a Mutual Fund? A Beginner's Guide
What a mutual fund is, how its price is set once a day, the main types, and how it differs from an ETF.
Beginner investing lessons and fake-money practice from the maker of Quoliv.
Quick answer
A mutual fund pools money from many investors and buys a basket of stocks, bonds, or other investments. You own shares of the fund, not the individual holdings. Unlike a stock, a mutual fund is priced once per business day, and you buy and sell shares with the fund itself rather than with another investor.
What you’ll learn
- One mutual fund share gives you a slice of everything the fund holds.
- The price, called net asset value or NAV, is calculated once each business day.
- You buy and sell shares from the fund, not on an exchange like a stock.
- Fees come out of the fund's value, so you pay them indirectly.
- Mutual funds are not insured, and you can lose money in one.
This explanation is part of our ETFs & Funds lessons path, where you can explore the idea in short lessons and quizzes.
What a mutual fund actually is
A mutual fund collects money from thousands of investors and invests it as one pot. A professional manager, registered with the SEC in the US, decides what the fund holds within the rules written in the fund's prospectus.
Because that pot is spread across many companies or bonds, one bad holding matters less than it would if you owned it on its own. Many funds also accept small opening amounts, which is why they are common inside workplace retirement plans.
How you can make or lose money
- Dividends and interest the fund collects get passed on to shareholders.
- Capital gains distributions, paid when the fund sells a holding at a profit.
- A rising NAV, if the investments the fund owns gain value.
- Losses, if those investments fall. There is no guarantee and no FDIC insurance.
Why the price only changes once a day
A stock price moves all day because buyers and sellers keep trading it. A mutual fund does not work that way. The fund adds up what it owns, subtracts what it owes, divides by the number of shares, and publishes that NAV after the market closes.
If you place an order during the day, you get the next calculated NAV, not the price you saw when you clicked. That means you cannot use a limit order or watch a mutual fund tick up and down.
With a mutual fund you are buying a day-end price, so short-term trading is not what it is built for.
Mutual fund vs ETF
| Mutual fund | ETF | |
|---|---|---|
| How you trade it | With the fund itself | On an exchange, like a stock |
| Pricing | Once per business day | All through the trading day |
| Order types | No limit or stop orders | Same order types as stocks |
| Minimum | Often a set dollar amount | The price of one share |
| What it holds | A basket of investments | A basket of investments |
The main types you will see
- Stock funds, which hold shares in companies.
- Bond funds, which hold debt and aim for income.
- Money market funds, which hold short-term cash-like securities.
- Target date funds, which shift their mix as a chosen year approaches.
- Index funds, which copy an index, versus actively managed funds, which try to beat one.
Fees matter more than they look
Fund costs are deducted from the fund's value rather than billed to you, so they are easy to miss. Small differences compound: a fund with higher costs has to perform better just to leave you in the same place. The expense ratio in the prospectus is the number to compare.
Quoliv's simulator trades stocks and ETFs rather than mutual funds, but $10,000 in fake money is a safe way to get used to how a basket of holdings moves before any real money is involved.
Sources and methodology
This guide was written for education using the primary sources below. It does not evaluate your finances or recommend an investment. Read our editorial policy.