Identification

• Mutual funds are investment companies that pool investor money. The mutual fund will have a manager or management team that selects investments for the fund based on the fund's objectives. Mutual funds are also called open-end funds because they sell and redeem shares from investors on a continuous basis. Other types of investment companies are closed-end funds, exchange traded funds-ETFs and unit investment trusts.
  
  

Function

• A mutual fund owns a pool of investment securities. The fund investors own shares in the fund. Each share represents proportional ownership in the pool. The share price or net asset value (NAV) is calculated by dividing the value of the fund assets by the number of fund shares outstanding. The NAV is calculated once each day after the investment markets have closed. As open-end funds, mutual funds sell shares directly to investors and redeem the shares at the NAV when an investor wants to sell.
  
  

Types

• The Investment Company Institutes divides up the list of mutual funds by the primary class of security they hold. Mutual funds can be classified as stock funds, bond funds or money market funds. The bond funds are further dividend into taxable bond and municipal bond sectors. Hybrid funds own a combination of both stocks and bonds. Mutual funds are further classified as either actively managed or index funds. In actively managed funds, the fund manager selects investments that meet the fund objectives with the goal of outperforming the overall market or give better than average returns in the fund's investment sector. Index funds own the same securities as a specific stock or bond index. Index funds have low expenses and will track the market performance of the fund's sector.
  
  

Considerations

• Investors can invest in mutual funds through an investment advisor or directly with the funds. Mutual funds sold by investment advisors usually have a sales charge or load. The sales charge will be included in the price for front-loaded funds and the investor will purchase shares at a price that includes the sales load on the NAV. Back-end loaded mutual funds have a redemption fee that declines over several years and higher internal expenses than the front loaded funds. Investors who buy directly from the mutual fund purchase no-load funds, which do not have a sales charge. No-load fund investors must do their own research about the different mutual funds.
  
  

Features

• Mutual funds pay out interest and dividends earned on the fund securities to the fund shareholders as dividends. Funds are required by law to distribute these earnings. Different mutual funds pay dividends monthly, quarterly or annually. If a fund sells securities at a profit and through the year the profits exceed any accumulated losses, the fund must distribute the net profits as capital gains. The dividend and capital gains distributions from mutual funds and be automatically reinvested into more shares of the fund or received as a check.
  
  

Warning

• Mutual funds are not insured or guaranteed by any government agency. Mutual fund values will go up and down based on market conditions and it is possible to lose money with mutual funds. Investors should understand the risks of any mutual fund before investing.