Mutual Funds

Mutual funds are financial tools that enable a multiple number of people to invest money into a single portfolio (a list of assets). The derived gains (income) or losses (debts) from the created portfolio are divided among each individual investor. Mutual funds invest in a number of things like stocks, bonds, cash securities, even individual industries (investments made in individual industries are called sector funds) - but not real estate. Legally, mutual funds can not invest in real estate. Nevertheless, each security runs its own level of risk and its success (or failure) depends on their type, maturity, and/or geographical location. The geographical restrictions plus other rules and regulations of mutual funds are fully explained in their prospectus - a plan for a proposed business enterprise. Every prospectus certifies that securities for sale have been filed with the Securities Exchange Commision and all open-end mutual funds must accompany a prospectus.

Because most mutual funds are open-end, shares are appropriated every day and participants who want to leave the fund may sell their share to the portfolio's manager. With closed-end mutual funds, the portfolio's manager introduces a fixed set of shares at its start, but does not appropriate funds nor buy shares from individuals who leave the fund. If a participant chooses to trade, sell, or buy a share, he or she must do so through a broker. New mutual funds however, called, "exchange traded funds" (ETF), utilize the capabilities of both open-ended and closed-end funds within regulations of course. Regulations of mutual funds often affect their values.

The values of mutual funds are called NAVs (net asset values) and are determined by the amount appropriated to each share. These values are calculated at the end of each day or several times a day. If mutual funds own shares invested in private institutions, their portfolio managers are responsible for estimating the values of these particular type of investments. This includes mutual funds that divide assets among different types of investments - similar to how a 401K plan is divided.

To determine how well mutual funds perform, one only need to ask about it's turnover - the number of shares that are bought and sold within a year. The turnovers of mutual funds are calculated as the percentages of net asset values (NAVs), however other things such as taxes and commissions reflect a truer turnover of mutual funds. Mutual funds therefore, can have a very low turnover - usually no more than six percent at the most - and this low turn-over may be strongly affected by commissions.

Commissions paid to a portfolio manager or broker are referred to as front-end loads. Front-end loads are received when shares are bought, and as a result, may reduce the value of the fund. Back-end loads, on the other hand, delay the payment of commissions until shares are appropriated to the individuals participating in mutual funds. Commission based mutual funds (also known as "load funds") are sold through financial planners, brokers, and others. But "no-load mutual funds" are sold through discount brokers for a flat fee, if any at all.