how mutual fund shares are priced
the value of the mutual fund depends on the performance of the securities it invests in when buying a unit or share of a mutual fund you get a part of its portfolio value investing in a share of a mutual fund differs from investing in stock shares unlike stock mutual fund shares do not give their holders voting rights and unlike etfs you can t trade your shares throughout the trading day mutual fund share prices come from the net asset value nav per share sometimes listed on platforms as navps a fund s nav is derived by dividing the total value of the securities in the portfolio by the number of shares outstanding mutual fund shares are typically bought or redeemed at the fund s nav which doesn t fluctuate during market hours but is settled at the end of each trading day the price of a mutual fund is also updated when the navps is settled pros and cons of mutual fund investingthere are many reasons that mutual funds have been the retail investor s vehicle of choice with an overwhelming majority of money in employer sponsored retirement plans invested in mutual funds the sec in particular has long paid very close attention to how these funds are run given their importance to so many americans and their retirements liquiditydiversificationminimal investment requirementsprofessional managementvariety of offeringshigh fees commissions and other expenseslarge cash presence in portfoliosno fdic coveragedifficulty in comparing fundslack of transparency in holdingsdiversification or the mixing of investments and assets within a portfolio to reduce risk is one of the advantages of investing in mutual funds a diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers a mutual fund can achieve diversification faster and more cheaply than buying individual securities trading on the major stock exchanges mutual funds can be bought and sold with relative ease making them highly liquid investments also for certain types of assets like foreign equities or exotic commodities mutual funds are often the most workable way sometimes the only way for individual investors to participate mutual funds also provide economies of scale buying only one security at a time could lead to hefty transaction fees mutual funds also enable investors to take advantage of dollar cost averaging which is putting away a set amount periodically no matter the changes in the market because a mutual fund buys and sells large amounts of securities at a time its transaction costs are lower than what an individual would pay for securities transactions a mutual fund can invest in certain assets or take larger positions than a smaller investor could a professional investment manager uses research and skillful trading a mutual fund is a relatively inexpensive way for a small investor to get a full time manager to make and monitor investments mutual funds require much lower investment minimums providing a low cost way for individual investors to experience and benefit from professional money management mutual funds are subject to industry regulations meant to ensure accountability and fairness for investors in addition the component securities of each mutual fund can be found across many platforms you can research and choose from funds with different management styles and goals a fund manager may focus on value investing growth investing developed markets emerging markets income or macroeconomic investing among many other styles this variety enables investors to gain exposure not only to stocks and bonds but also to commodities foreign assets and real estate through specialized mutual funds mutual funds provide prospects for foreign and domestic investment that might otherwise be inaccessible liquidity diversification and professional management all make mutual funds attractive options however there are drawbacks like many other investments without a guaranteed return there is always the possibility that the value of your mutual fund will depreciate equity mutual funds experience price fluctuations along with the stocks in the fund s portfolio the fdic does not guarantee mutual fund investments 13mutual funds require a significant part of their portfolios to be held in cash to satisfy share redemptions each day to maintain liquidity and the ability to accommodate withdrawals mutual funds typically have to keep a larger percentage of their portfolio as cash than other investors because this cash earns no return it s called a cash drag fees that reduce your overall payout from a mutual fund are assessed whatever the performance of the fund failing to pay attention to the fees can cost you since actively managed funds incur transaction costs that accumulate and compound year over year dilution is also the result of a successful fund growing too big when new money pours into funds with solid track records the manager could have trouble finding suitable investments for all the new capital to be put to good use the sec requires that funds have at least 80 of assets in the particular type of investment implied by their title 14 how the remaining assets are invested is up to the fund manager however the categories that qualify for 80 of the assets can be vague and wide ranging some less scrupulous fund managers might manipulate prospective investors via their fund titles for example a fund that focuses narrowly on argentine stocks could be sold with a much more ranging title like international high tech fund a mutual fund allows you to request that your shares be converted into cash at any time however unlike stocks and etfs that trade throughout the day mutual fund redemptions can only take place at the end of the trading day 