Definition
A mutual fund pools money from many investors to buy a diversified portfolio of securities run by a professional manager, with each investor owning units in proportion to the amount invested. Depending on the jurisdiction, such funds may be set up as unit trusts or investment companies.
How it works
Investors subscribe and redeem with the fund, often through a distributor, at a price based on the net asset value, which is usually calculated once per dealing day after markets close. An order placed during the day is normally processed at the next calculated NAV.
Funds may be actively managed to beat a benchmark or passively track an index. Costs include the expense ratio and sometimes sales or redemption charges, and they reduce returns whether performance is good or poor. Unlike ETF units, mutual fund units do not trade at changing prices on an exchange during the day.
Illustrative example
Illustration with fictional figures: Fund A's NAV is HK$12.50 per unit when an investor's HK$10,000 subscription is processed, so it buys 800 units (10,000 ÷ 12.50) before any sales charge. If the NAV is HK$13.00 when the units are redeemed, they are worth 800 × 13.00 = HK$10,400, a 4.0% gain before any redemption charge and tax, because ongoing expenses are already reflected in the NAV.
What to watch for
Active mutual funds can trail their benchmark after fees, and sales charges can be material, so compare costs and track record against a suitable benchmark. Redemptions can also be delayed or limited in stressed markets.