What Is a Mutual Fund and How Do They Work?
- Mutual funds are typically managed by one or more individuals who claim to have a special expertise in investing money. Many mutual funds have been started by individuals who had already gained some fame for their investing prowess. In addition to the money that they make from their own investments, mutual fund managers typically earn income from the management fees that are part of the cost of joining a mutual fund.
- The majority of mutual funds are classified by the Securities and Exchange Commission as open-ended. This means that the funds are continually issuing new shares to investors who wish to enter the fund. As well, the mutual fund must be willing to purchase back any shares it's already sold at the current net asset value of the fund. A mutual fund will either be further legally classified as a trust or a corporation.
- Some mutual funds chose to be classified as close-ended. These mutual funds operate more like a company that issues an initial public offering of stock that can then be purchased by investors and sold amongst each other. As the trading price of these shares is market determined, it is unlikely to equal the current net asset value of the fund. These funds are unable to grow as open-ended funds are by issuing new stock.
- Many mutual funds have certain specializations, investing only in a certain kind of company or industry. Socially conscious mutual funds have attracted attention in recent years by choosing to invest only in companies that matched certain ethical criteria. There are "green" mutual funds, for instance, that claim to invest only in companies that are environmentally responsible. As they have grown in number, the specialization of mutual funds has increased significantly, meeting many different investor demands.