Mutual Fund Investing Info

Mutual funds are essentially the brain-child of Wall Street. They’re also considered to be one of the easiest of often least stressful ways to invest in the market. Because of the simplicity and the way mutual funds are handled they tend to be popular ways for new investors to buy into stocks, bonds, real estate and short-term cash investment.

 

What is a Mutual Fund?

A mutual fund is money that has been pooled together, provided by individual investors like yourself as well as organizations. Mutual funds are handled by a fund manager who will invest and handle the cash that investors provide. The goal set forth for the manager depends on the type of fund the group is investing in; fixed-income funds for example are managed to strive for the highest yield at the lowest possible risk. A manager of a long-term growth fund would typically attempt to beat the DJ industrial average or the S&P 500 within a fiscal year.

 

Four Lines of Mutual Fund Division

Mutual funds are divided along four lines. Investors choose to invest in closed-end funds or open-end funds. Open-end funds are further divided into Load vs. No-load. Let’s look at each individually:

Closed-end Funds

A closed-end fund has a pre-set number of shares that are allocated to the public through the primary public offering and these shares are traded on the open. Closed-end funds do not redeem or issue new shares like a normal mutual fund. Because of these two key points, closed-end mutual funds are subject to the laws of supply and demand, and as a result the shares normally trade at variable discount to their net asset value.

Open-end Funds

Unlike Closed-end Funds, these mutual funds are open-ended and do not have a set number of shares. When a new investor is interested in purchasing shares, new shares are issues based on the current net asset value. The fund will then redeem the shares when the investor decides to sell. A majority of mutual funds are open-ended. These funds always reflect the net asset value of the fund’s underlying investments because shares are both created and destroyed as needed.