Mutual Funds

A mutual fund is a pool of money collected from many investors and invested by a professional manager into a basket of securities, such as stocks or bonds, according to a stated strategy or objective. When you buy into a mutual fund, you are not buying the stocks or bonds directly; you are buying shares of the fund itself, and the fund in turn owns all the underlying holdings on behalf of everyone in it.

The value of one fund share is called the net asset value, or NAV. It is calculated once per trading day after the market closes, by adding up the value of everything the fund owns, subtracting any costs owed, and dividing by the number of shares outstanding. This is different from a stock, which you can buy or sell at any moment the market is open at a constantly changing price. A mutual fund only trades once a day, at that day's closing NAV, regardless of what time you placed your order.

Because a fund is professionally managed, it charges a fee, usually expressed as an expense ratio, a small annual percentage taken out of the fund's assets to pay the manager and cover operating costs. Some funds are actively managed, meaning a person or team picks investments trying to beat the market; others are passively managed, meaning they simply track an index. This distinction affects both the fee and the likely performance pattern.

The nuance that trips people up is timing and liquidity. Because orders fill at the next calculated NAV rather than instantly, mutual funds are not well suited to intraday trading, and this is the main reason day traders generally avoid them in favor of exchange-traded funds or individual stocks, which trade continuously throughout the day.