| A mutual fund is a portfolio of stocks, bonds, or | | | | Open-end funds can have an unlimited number of |
| other securities that is collectively owned by | | | | investors or money in the fund. Managers of |
| hundreds or thousands of investors and managed | | | | closed-end funds, on the other hand, decide |
| by a professional investment company. The | | | | upfront how many shares they will issue and |
| shareholders are people who have similar | | | | when they will sell them. The only way to |
| investment goals. Each fund has specific | | | | purchase shares in a closed-end fund, once the |
| investment criteria, which are spelled out in its | | | | original shares have been sold, is to buy them |
| prospectus, the official booklet that describes the | | | | from a current investor. |
| mutual fund. | | | | Occasionally, open-end funds can and do close to |
| Investors then know what they are getting and | | | | new investors, often because of high cash inflows |
| can match their objective to that of a fund. The | | | | that cannot be invested in a timely manner. They |
| pooled money has more buying power than one | | | | do not become closed-end funds, however, |
| investor alone, so that a fund can own hundreds | | | | because current shareholders can still buy |
| of different securities. Thus, its success is not | | | | additional shares from the fund company. |
| dependent on how just one or two companies | | | | When investors purchase a mutual fund, they |
| perform. | | | | own a piece of an investment portfolio. They |
| A mutual fund makes money in several ways: by | | | | share in the gains, losses, and expenses in |
| earning dividends or interest on the investments it | | | | proportion to the amount they have invested in |
| owns and by selling securities that have | | | | the fund. |
| appreciated in value. You, in turn, make money in | | | | At the close of every trading day, a mutual fund |
| the form of dividends and interest that are | | | | company tallies the value of all the securities in its |
| passed on to you and the increase (or decrease) | | | | portfolio and deducts its expenses (e.g., |
| in the fund's value. The mutual fund manager | | | | management fees, administrative expenses, |
| keeps constant watch on financial markets and | | | | advertising costs). The balance is divided by the |
| adjusts the portfolio to achieve the strongest | | | | number of shares owned by shareholders to |
| returns. By owning part of a fund, the hard work | | | | arrive at the dollar value of one share of the |
| of selecting and monitoring stocks and bonds is | | | | mutual fund. |
| done for you. | | | | This value, the net asset value or NAV, is the |
| The majority of mutual funds available are | | | | price your fund pays you per share when you sell. |
| open-end funds, which are the focus of this unit. | | | | |