Underlying Investment

Underlying Investment

The sum of the investments represented in a mutual fund or annuity. When one buys a share in either of these investment vehicles, the share represents a right to the dividends, coupons, and capital gains or losses in each of the securities represented in the fund or annuity in proportion to their representation in it. For example, suppose a mutual fund consists of 50% of Stock A, 25% of Stock B, and 25% of Bond C. All other things being equal, ownership of a share in that mutual fund effectively means that one owns half a share of Stock A and one quarter of a share in Stock B and Bond C. One refers to these investments collectively as the underlying investment. See also: Underlying asset.

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Underlying investment. The investments in a mutual fund, a variable annuity's separate account fund, or other fund makes are considered the fund's underlying investments.

The value of a single share or unit of the fund is based on the combined value of all its underlying investments, minus fees and expenses, divided by the number of outstanding shares or units.

In some cases, when the item underlying a derivative investment is a security, such as the individual stock underlying an equity options contract, it is also called an underlying investment.

However, when the underlying item is a consumable commodity, such as corn, or a financial product, such as an equity index, it is called the underlying product, the underlying instrument, or sometimes simply the underlying.