A mutual fund is an open-end investment fund that pools money from many investors, invests it in a portfolio of stocks, bonds or other assets, and stands ready to issue and buy back its own shares every business day. Investors buy and sell directly with the fund at the net asset value (NAV) per share, worked out once a day after markets close, rather than trading with each other on an exchange.
In the United States a mutual fund is legally an open-end management investment company registered under the Investment Company Act of 1940 and supervised by the Securities and Exchange Commission (SEC). Outside the US, similar vehicles are called unit trusts or OEICs (UK) and SICAVs or FCPs (continental Europe), usually under the UCITS rules. The mutual fund is often compared with the exchange-traded fund (ETF), which holds similar portfolios but trades on an exchange all day.
Mutual fund in plain terms
A mutual fund works like a large shared basket at a market stall that is only valued once a day, at closing time. You can drop money in or take money out whenever you like, but everyone who comes during the day gets that evening's price, not the price at the moment they arrived.
The stallholder (the fund manager) decides what goes into the basket. The basket can grow to any size, because new money simply buys more items and new slices are cut for the newcomers. When someone leaves, the stallholder sells a few items or uses spare cash to pay them out.
How buying and selling works
Since 1968 the SEC's Rule 22c-1 has required "forward pricing": an order is filled at the next NAV calculated after the fund receives it. Most US funds strike their NAV at 4:00 p.m. Eastern time, so an order placed at 11 a.m. and one placed at 3:59 p.m. get the same price. The fund must pay redemption proceeds within seven days under Section 22(e) of the 1940 Act, and in practice most pay within one or two business days.
To meet redemptions, funds keep some cash and must, under Rule 22e-4 adopted in 2016, run a liquidity risk management programme that limits hard-to-sell holdings to 15% of net assets. A money market fund is a special type of mutual fund with stricter rules on maturity and credit quality.
Structure and governance
A US mutual fund is usually a corporation or business trust with no employees of its own. Its board of trustees or directors, which must include independent members, approves the advisory contract and fees each year. An investment adviser employs the portfolio manager who picks the holdings; a fund custodian holds the assets; a principal underwriter distributes the shares; and a transfer agent keeps the shareholder register.
Funds disclose their strategy, risks and costs in a prospectus, with a short summary version at the front, and report holdings and results in shareholder reports. Many investors also rely on a fund fact sheet for a quick monthly or quarterly snapshot.
By what they hold, mutual funds are usually grouped as an equity fund, a bond fund, a balanced fund (ICI calls these "hybrid" funds) or a money market fund. They can be actively managed or index funds that track a market index. According to the Investment Company Institute (ICI), US mutual funds held about $31.4 trillion at the end of 2025, with equity funds making up 52% and money market funds 25% of that total.
A single fund often offers several share classes that hold the same portfolio but charge differently. Some carry a sales charge (a "load") paid when buying or selling, others an ongoing 12b-1 fee for distribution. All pay an ongoing expense ratio, which includes the management fee. ICI reports asset-weighted average expense ratios of 0.40% for equity mutual funds and 0.36% for bond mutual funds in 2025.
Taxes and limitations
US mutual funds are normally taxed as regulated investment companies under Subchapter M of the Internal Revenue Code. They avoid tax at the fund level by passing at least 90% of their net income to shareholders, which is why funds pay a dividend and, usually near year-end, a capital gains distribution. Shareholders in taxable accounts owe tax on these payouts even if they reinvest them and even if the fund lost value that year.
Other drawbacks include once-a-day pricing (no intraday trading or limit orders), costs that compound against the investor over decades, and the tendency of high portfolio turnover to generate taxable gains. ETFs, which can often meet redemptions by handing over securities rather than selling them, tend to distribute fewer gains. Even so, mutual funds remain central to US retirement saving, including 401(k) plans and the individual retirement account (IRA).
History
Pooled investment trusts date back to 18th-century Netherlands and 19th-century Britain. The first open-end US mutual fund, the Massachusetts Investors Trust, launched in March 1924. After the 1929 crash, Congress passed the Investment Company Act of 1940, which still forms the core of US fund regulation. Index mutual funds for retail investors arrived in the 1970s and, together with ETFs, have driven fees steadily down since.