Mutual Funds & How They Work

2. The Four Major Parts

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Closed-end funds have a set number of shares issued to the public. These shares are traded on the open market, and due to the fact that there are a limited number of such shares, the values are more sensitive to supply and demand and more commonly trade at a discount.

Open-ended funds are funds that have no limit on the number of shares. Instead, new funds are issued based on the current net asset value and are redeemed when the investor decides to sell. Open end funds reflect the net asset value of the funds underlying value because shares are created and destroyed as needed by the market.

The net asset value of a fund is the total value of the securities in the fund minus liabilities, divided by shares outstanding. For example, you own 1,000 shares of the ABC Mutual Fund. The fund has a net asset value of $10 per share. Your investment in the fund equals $10,000. You own 1,000 shares at $10 per share.

Load-vs- no-load simply refers to a sales commission. If the fund charges a load, then the investor will pay a commission on top of the net asset value of the fund’s shares. Most investors opt for no-load funds, as they offer higher returns due to lower expenses associated with ownership.

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