mutual fund

Definition

Investment firm managed by finance professionals that raises its capital by selling its shares (called units) to the public. Mutual fund's capital is invested in a pool (portfolio) of corporate securities, commodities, options, etc., that match the fund's objectives detailed in its prospectus. The level of a mutual fund's income from its portfolio determines the daily market value (called net asset value) at which its units are redeemable on any business day, and the dividend paid to its unit holders. Mutual funds are of two main types: (1) open end fund, where the capitalization of the fund is not fixed and more units may be sold at any time to increase its capital base, (2) closed end fund, where capitalization is fixed and limited to the number of units authorized at the fund's inception (or as formally altered thereafter). Mutual funds usually charge a management fee (typically between 1 and 2 percent of the fund's annual earnings) and may also levy other fees and sales commission (called 'load') if units are bought from a financial advisor. The term 'mutual fund' has no legal bearing, and may be referred to as unit investment trust in the US and unit trust in the UK and other British Commonwealth countries.