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.