Mutual funds can be a good opportunity for small or individual investors to benefit from a professionally managed investment portfolio.
They usually invest in a large number of securities, and their performance is tracked as the change in the market cap of the fund, which itself is determined by the performance of the underlying investments.
Mutual funds charge a sales commission, known as load, as well as management fees related to the fund’s administration. While all funds charge management or administration fees, there are funds in the market that are no-load, meaning they do not charge a sales commission.
The returns of a mutual fund are based on the performance of its constituents. Therefore, skill and expertise is required to pick equities that provide desired returns. Highly trained professionals function as fund managers for mutual funds.
You can use fund rankings issued by research firms like Morningstar and Standard & Poor to select funds. Buying shares of a mutual fund does not give investors voting rights in a company; instead, the fund manager votes on their behalf.
However, since mutual funds generally incorporate hundreds of different securities, it does give investors the benefit of diversification of their portfolios.
The value of a share of mutual fund is called the net asset value per share, or the NAV. The price is determined by taking the net value of all the securities in the fund and dividing by the outstanding shares.
Mutual funds can be open-ended or closed-ended. An open-ended mutual fund issues an unlimited number of shares in the open market and redeems them at market value from investors.
The share price of an open-end fund is based on the net asset value of its constituents. Closed-end mutual funds function in the opposite manner i.e., they issue a fixed number of shares and redemption is not allowed.
Instead, the only way for an investor to “redeem” a share is by selling it to someone else.
Therefore, their price is based on the dynamics of supply and demand and they always trade at a discount to the net asset value of their constituents.
