Mutual Funds Explained

What is a Mutual Fund?

A mutual fund is a pool of money from many investors, managed by a professional fund manager. Instead of picking individual stocks or bonds yourself, you buy shares in the fund, and the manager invests on your behalf.

Think of it like a group buying a pizza together - everyone chips in, and everyone gets a slice.

Popular fund companies: Vanguard, Fidelity, BlackRock, Amundi, DWS.

How It Works

You buy shares of the fund (not the underlying assets directly)
The fund manager buys stocks, bonds, or other assets
You own a portion of the entire portfolio
The fund's value changes daily based on its holdings

Key Terminology

NAV (Net Asset Value) - The price of one share in the fund, calculated once per day after markets close. Example: A fund holds €10 million in stocks and has 1 million shares outstanding. NAV = €10 per share. If the stocks rise 5%, NAV becomes €10.50.
Expense Ratio - Annual fee as a percentage of your investment. A 1% expense ratio means you pay €10/year per €1,000 invested.
Load - Sales commission. "No-load" funds have no sales charge.
AUM (Assets Under Management) - Total money in the fund. Larger funds often have lower fees.
Minimum Investment - Some funds require €1,000+ to start.

Types of Mutual Funds

By Asset Class

Equity Funds - Invest in stocks. Sub-types include:
- Growth funds - Companies expected to grow fast (e.g., tech companies)
- Value funds - Underpriced companies trading below their true worth
- Dividend funds - Companies that pay regular dividends
Bond Funds - Invest in government/corporate bonds
Money Market Funds - Invest in very safe, short-term loans (like government bills that mature in 90 days). Similar to a savings account but with slightly better returns. Very low risk, but unlike savings accounts, they are not deposit-insured - if the fund fails, you could lose money.
Balanced Funds - Mix of stocks and bonds

By Strategy

Actively Managed - Manager picks investments, tries to beat the market
Passively Managed - Tracks an index
Sector Funds - Focus on one industry (tech, healthcare, energy)
Target-Date Funds - Automatically adjust risk as you approach retirement

Costs Matter

Fees eat into your returns over time. Three main fees to watch:

Fee Type	Range	When Charged
Expense Ratio	0.5% - 2%	Ongoing annual fee, compounds every year
Front-End Load	0% - 5%	One-time fee when you buy
Back-End Load	0% - 5%	One-time fee when you sell

Example: €10,000 invested for 20 years at 7% return:

0.2% expense ratio → ~€37,000
1.5% expense ratio → ~€29,000

That 1.3% difference costs you ~€8,000.

Pros and Cons

Pros:

Professional management
Instant diversification
Easy to buy/sell (but only at end-of-day price, unlike ETFs which trade throughout the day)
Regulated and transparent

Cons:

Fees reduce returns
No control over individual holdings
Most active funds underperform their benchmark. A benchmark is simply the "scorecard" used to judge if a fund did well or poorly. Examples:
- A US stock fund is compared to the S&P 500. If S&P 500 returned 10% and your fund returned 8%, the fund underperformed.
- A European stock fund might use Euro Stoxx 50 as its benchmark.
- A global fund might use MSCI World.
Capital gains taxes when manager sells holdings

What to Look For

Low expense ratio - Below 0.5% is good for active funds. Below 0.2% is excellent but typically only achievable with index/passive funds.
No-load - Avoid sales commissions
Consistent performance - Check 5-10 year track record
Fund size - Very small funds (under €50-100 million) may shut down if they can't cover operating costs, forcing you to sell. Very large funds are often forced to invest only in big, established companies - they can't buy small-cap stocks without owning too much of the company, and large trades move the stock price against them (pushing prices up when buying, down when selling). This makes them more conservative with typically lower returns.

Key Takeaways

Mutual funds pool money from many investors for professional management
Fees (expense ratio, loads) directly reduce your returns
Most actively managed funds fail to beat their benchmark after fees
Look for low-cost, no-load funds with consistent track records

Not financial advice. Always do your own research.

Last updated: February 2026