RiskPicksWhat is a Mutual Fund?
A mutual fund pools money from many investors and uses it to buy a diversified portfolio of stocks, bonds, or other securities. A professional fund manager decides what to buy and sell. When you invest in a mutual fund, you own shares of the fund itself, not the individual stocks inside it.
How mutual funds differ from ETFs and stocks
- Trades once per day: mutual fund shares are priced and traded only at the end of each trading day (4:00 PM ET). You cannot buy or sell during market hours like a stock or ETF
- Managed by a professional: a fund manager actively picks investments (for actively managed funds) or tracks an index (for index funds)
- Minimum investment: many mutual funds require a minimum investment of $1,000 to $3,000 to get started
- No ticker trading: you do not place market orders or limit orders. You submit a purchase request and get the end-of-day price
Types of mutual funds
- Index funds: passively track an index like the S&P 500. Low fees. The Vanguard 500 Index Fund (VFIAX) is the most famous example
- Actively managed funds: a manager picks stocks trying to beat the market. Higher fees. Most underperform index funds over time
- Bond funds: invest in government or corporate bonds for income
- Target-date funds: automatically shift from stocks to bonds as you approach a target retirement year
Why day traders should know about mutual funds
- Institutional flow: mutual funds are among the largest buyers and sellers of stocks. Their buying and selling creates the institutional flow that moves prices
- End-of-day volume: mutual fund trades settle at 4:00 PM, which is one reason volume spikes in the last minutes of trading (power hour)
- 13F filings: large mutual funds must disclose their holdings quarterly. Traders use these filings to see what the big money is buying
Most people's retirement accounts (401k, IRA) are invested in mutual funds. When financial news says "fund flows were positive this week," they mean money flowed into mutual funds and ETFs, which means those funds had to buy stocks.