WHAT IS A MUTUAL FUND?
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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
establish a daily value for their shares, called the net asset value
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.