What Is a Mutual Fund and How Does It Work?
A plain-language introduction to pooling, units, NAV, fund categories, costs and market risk.
The basic idea
A mutual fund pools money from many investors and invests it according to a stated objective. A professional fund-management team makes investment decisions within the scheme's mandate.
In return for the money invested, each investor receives units. The value of those units changes with the value of the scheme's underlying investments.
Understanding NAV
Net Asset Value, or NAV, is the per-unit value of a mutual fund scheme after accounting for its assets and liabilities. NAV is generally declared at the end of each business day.
A lower NAV does not automatically mean that a scheme is cheaper or has more growth potential. Suitability depends on the scheme's objective, portfolio, risks, costs and your needs.
Common categories
Mutual funds are grouped by what they invest in and how they are managed.
- Equity funds primarily invest in shares and can experience significant market volatility.
- Debt funds invest in fixed-income instruments and carry interest-rate and credit risks.
- Hybrid funds combine asset classes in different proportions.
- Index funds and ETFs aim to track a specified market index, subject to tracking difference.
Costs and risks
Schemes charge expenses that are reflected in NAV. Other costs and taxes may apply depending on the scheme and transaction. Read the Scheme Information Document, Key Information Memorandum and current disclosures.
Mutual funds do not guarantee returns unless a guarantee is explicitly structured and disclosed. Market movements can cause losses, including loss of principal.
Before investing
Start with your goal, time horizon, ability to tolerate loss, liquidity needs and understanding of the product. A scheme's past performance is not a promise of future results.