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  Tuesday November 21, 2017

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WHAT IS A MUTUAL FUND?
Learn even more about this topic with the Encyclopedia of Personal Finance™

A mutual fund is an investment company that pools the money of its investors to buy stocks, bonds, and/or other assets. Each mutual fund has its own investment strategy and goals. Instead of buying a single stock or bond, you are buying a portion of a wide variety of investments. Investors buy shares of a fund to become fund shareholders and partake in the losses or gains of the fund on an equal basis.

The most common type of mutual fund is called an open-end mutual fund. Open-ended funds continuously offer shares of their fund directly to shareholders.

When investors buy shares in an open-end fund, their money goes directly into the fund. When they sell shares, money is taken directly out of the fund.

Open-end funds establish a daily value for their shares, called the net asset value (NAV).

On the other hand, a closed-end fund has a limited number of shares available to investors, made through an initial offering.

After the initial offering, its shares are traded on an exchange through brokers rather than directly through the mutual fund. The prices of closed-end shares are determined by supply and demand for the funds rather than changes in market prices of the individual securities that make up the funds. Unlike open-end funds, closed-end funds do not redeem their shares.

You can also invest in mutual funds through a unit investment trust (UIT). Instead of being traded, the securities within a unit investment trust remain fixed throughout the life of the trust.

Unlike closed-end funds, UITs may redeem shares from shareholders at the net asset value. Investors earn income through interest or dividends earned on the trusts until the securities in the trusts mature (are due to be paid out) or are liquidated.

Many funds belong to families of funds that may share common services and management to lower overall operation costs.

It can sometimes be easier to transfer your shares from one fund to another if you keep your investments within the family.

Now that you understand what a mutual fund is, let's look at how one is run.




LEARN EVEN MORE WITH THE ENCYCLOPEDIA OF PERSONAL FINANCE. CLICK HERE!

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