Mutual Funds Explained: What You Actually Own
A simple guide to the structure of mutual funds and what shares represent.
A mutual fund is a collective fund structure that pools capital from multiple participants and holds it in a diversified portfolio of stocks, bonds, or other securities. This enables individuals to access diversification and professional management, even with smaller initial amounts.
What You Buy
With a mutual fund like FARMX, you don’t buy company shares directly — you hold units of the fund, which itself holds a diversified portfolio of stocks and bonds. The price per unit is called the Net Asset Value (NAV), which is calculated as the total value of all assets in the fund divided by the number of units issued.
Suppose you purchase $10,000 worth of units when the fund’s NAV is $20. You’ll receive: $10,000 ÷ $20 = 500 fund units. If the fund’s NAV increases by 5% over the year, the total value of your units rises by $500. Keep in mind that mutual funds may also charge management fees and other expenses, which can reduce the net value of your holdings.
But how it appears depends on how the fund handles gains:
| Scenario | What Happens | Your End Value |
|---|---|---|
| 1. Reinvested gain | You get 25 new units (500 + 25 = 525) while NAV stays $20 | $10,500 |
| 2. NAV grows | NAV rises to $21, you still own 500 units | $10,500 |
Both outcomes are identical in value — but no cash appears until you sell.
Selling Units
If you want to withdraw $2,000, you sell: $2,000 ÷ $20 = 100 units. You now hold 400 units worth $8,000, and have $2,000 in cash — the realized value of the sold units.
Bottom Line
A mutual fund unit represents a proportional stake in the fund’s asset pool. Its value changes as the underlying assets change — but it is realized only when units are sold.