Course 101: What Is a Mutual Fund?
The Mechanics
In this course
1 Introduction
2 The Mechanics
3 The Benefits

Many people think of mutual funds as "products." But when you buy a mutual fund, you're actually buying an ownership stake in a corporation that in turn hires a money manager to invest its money. The price of a single ownership stake in a fund is called its net asset value, or NAV. Invest $1,000 in a fund with an NAV of $118.74, for example, and you will get 8.42 shares. ($1,000 / $118.74 = 8.42.)

The fund manager combines your money with that of other investors. Taken altogether, those investments are called the fund's assets. The fund manager invests the fund's assets, typically by buying stocks, bonds, or a combination of the two. (Some funds buy more complicated security types.) These stocks or bonds are often referred to as a fund's "holdings" and all of a fund's holdings together are its "portfolio."

A fund's type depends on the kinds of securities it holds. For example, a small-company stock fund invests in the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature.

For example, Vanguard 500 Index's three largest holdings are ExxonMobil XOM (3.45% of its portfolio as of March 31, 2011), Apple AAPL (2.65%), and Chevron CVX (1.78%). A $1,000 investment in that fund means that you own about $34.50 of ExxonMobil, $26.50 of Apple, and $17.80 of Chevron. In fact, you own all 500 stocks in the fund's portfolio.

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