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How Mutual Funds Work

  • The fund sponsor raises money from the investing public, who become fund shareholders. It then invests the proceeds in securities (stocks, bonds and money market instruments) related to the fund's investment objective. The fund provides shareholders with professional investment management, diversification, liquidity and investing convenience. For these services, the fund sponsor charges fees and incurs expenses for operating the fund, all of which are charged proportionately against a shareholder's assets in the fund.

  • The most prevalent and well-known type of mutual fund operates on an open- ended basis. This means that it continually issues (sells) shares on demand to new investors and existing shareholders who are buying. It redeems (buys back) shares from shareholders who are selling.
  • Mutual fund shares are bought and sold on the basis of a fund's net asset value (NAV). Unlike a stock price, which changes constantly according to the forces of supply and demand, NAV is determined by the daily closing value of the underlying securities in a fund's portfolio (total net assets) on a per share basis.