A mutual fund is a pool of money invested on behalf of a group of people with similar investment interests. When you buy a mutual fund, a professional investment expert, called a portfolio manager, uses your money and the money of other investors to buy investments for the mutual fund. Each mutual fund has its own investment objective and the portfolio manager invests according to that objective.
If those investments make a profit, everyone who invested in the fund shares in the profit. If the investments lose money, everyone shares in the loss. Each investor also pays a part of the cost of operating the fund, which is measured by the fund’s management expense ratio (MER). The higher the MER, the higher the fund’s operating expenses.
The size of your part of the profits, losses or expenses depends on how much money you put into the fund. Funds are sold in units, but unlike stocks, you can have partial units.
Mutual fund unit prices are based on the fund’s net asset value. This is the value of everything the fund owns, minus everything it owes, divided by the total number of units held by investors. The net asset value fluctuates.
Funds may pay you a portion of the dividends, capital gains, and interest they earn. These payments are called distributions. Your distributions can be reinvested in the fund or you can be paid in cash. Distributions lower the fund’s net asset value per unit because the fund’s cash has been reduced or the numbers of units have been increased.
The settlement date for a mutual fund trade is normally three business days, but varies with the type of fund being transacted. A money market mutual fund will settle in one day while a mutual fund that prices once a week will settle at the start of the following week. A detailed explanation on the normal processes and settlement periods of a mutual fund can be found in the fund’s prospectus.