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 pooled investment vehicle that collects money from many investors and invests it in a diversified portfolio of stocks, bonds, or other securities. This enables individual investors to access diversification and professional management, even with smaller investment amounts.
What You Buy
When you invest in a mutual fund like FARMX, you don’t buy company shares directly — you buy 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 invest $10,000 when the fund’s NAV is $20 per unit. You’ll receive: $10,000 ÷ $20 = 500 fund units. If the fund reports a 5% annual return, that equals $500 profit after a year. Keep in mind, mutual funds may also charge management fees or other expenses, which can impact your net returns.
But how it appears depends on how the fund handles gains:
| Scenario | What Happens | Your End Value |
|---|---|---|
| 1. Reinvested return | 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 — your realized gain.
FinImpulse Insight
Mutual funds offer diversified growth — but profits become real only when you sell your units.
We provide the data — you decide what’s right.