ETFs & Funds · Beginner · 5 min

What is a fund?

You can explain how a fund pools money, how its share price is calculated, and why fund assets are kept apart from the fund company.

One basket, many shares

Spreading money across a hundred companies is a good idea. Doing it yourself is not easy: a hundred orders, a hundred fees, and for many people simply not enough money to buy a sensible amount of each.

Funds solve that problem. They were invented long before trading apps, and today they hold a large part of the world's savings. This lesson explains how a fund works, what one fund share is worth, and what protects the money inside it.

Pool, invest, keep apart

An investment fund collects money from many investors and invests it together, following rules set out in its documents: what it may buy, how much of each, and at what cost. Every investor owns shares of the fund in proportion to what they paid in.

Three roles are usually separate:

The fund company runs the fund and its manager makes the investment decisions.
The depositary, usually a bank, keeps the fund's assets. In the EU, UCITS rules require these assets to sit in segregated accounts, out of reach of the depositary's creditors if it fails.
The investors own the fund's assets through their shares.

EU funds under the UCITS rules must also spread their risk. As a basic rule, a UCITS may not hold more than 5% of its assets in securities of a single issuer. National law can raise that to 10% for some holdings, as long as all such larger positions together stay below 40%.

What is one fund share worth? The net asset value, or NAV: the value of everything the fund owns, minus its liabilities, divided by the number of fund shares. The SEC explains that many funds calculate it once every business day, after the markets close.

There are two ways to buy fund shares. With a traditional mutual fund, you buy from and sell back to the fund company at the next NAV. With an exchange-traded fund, you trade on a stock exchange during the day. The next lesson covers that difference.

NAV 24.50

A fictional fund owns shares and cash worth 50 million. It owes 1 million in fees and other liabilities. It has issued 2 million fund shares.

Net assets: 50 million − 1 million = 49 million.
NAV per share: 49 million ÷ 2 million = 24.50.
An investor with 100 fund shares holds 2,450.

If the shares in the fund rise 10% overnight, its assets grow to 55 million, and the NAV rises to 27.00. If they fall, the NAV falls just as directly.

Common mistakes

"A fund cannot lose money." It carries the market risk of everything it holds.
Confusing the fund company with the fund. The assets belong to the investors, not to the company.
Ignoring the rules in the documents. They decide what the fund may buy and what it costs.
Assuming all funds are diversified. Some invest in one sector or theme only.

The takeaway

A fund pools money from many investors and invests it by fixed rules. Each share is worth its slice of the fund's net assets.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the step where the assets are kept safe, apart from the fund company.

Tap the chart.

In EU UCITS funds, a depositary keeps the assets in segregated accounts. They are out of reach of the depositary's creditors.
2A fund holds assets worth 50 million, has liabilities of 1 million and 2 million shares. What is the net asset value per share?

NAV per share = (assets − liabilities) ÷ shares = (50 − 1) million ÷ 2 million = 24.50.
3What does the EU's UCITS framework limit, among other things?

As a rule, a UCITS may hold at most 5% of its assets in securities of one issuer, with limited exceptions up to 10%.
4Does a fund protect you from falling markets?

A fund spreads risk across many holdings, but it carries the market risk of everything it owns.

of 4 correct.