Understanding Mutual Funds

Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the financial assets it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio's value. That’s why, investing in a share of a mutual fund is different from investing in shares of stock. A share of a mutual fund represents investments in many different assets instead of just one holding.

That's why the price of a mutual fund share is referred to as the net asset value (NAV) per share, sometimes. A fund's NAV is derived by dividing the total value of the assets in the portfolio by the total amount of shares outstanding. Outstanding shares are those held by all shareholders, company officer (ex: fund manager) or insiders. Mutual fund shares can typically be purchased or redeemed as needed at the fund's current NAV.

Mutual fund involves the release of some internal unit which represents all assets of the fund. The price per share is simple:

total value of all assets in the fund / amount of shares

Hence, deposits and withdrawals should not affect the price of the unit. Mutual funds need to mint new units on each deposit event and burn units on each withdrawal event. For these purposes, the issuance is made and the mechanisms for issuing and burning coins are automated.