Basics of Mutual Funds

Before we start the mutual fund research process to find top mutual funds and compare mutual funds, we should be familiar of the types of mutual funds. For mutual fund research purposes, there are two types of mutual funds: closed-end mutual funds and open-end mutual funds. We are not talking about no load mutual funds yet. No load mutual funds will be discussed in other section of Mutual Fund Research guide. The best mutual funds depend on the needs of the mutual fund investor.

Closed-end mutual funds have a fixed number of shares and usually trade on a stock exchange.

Open-end mutual funds are more popular than closed-end mutual funds. Open-end mutual funds have an unlimited number of shares and are not listed on a stock exchange.

What is an open end mutual fund?

An open end mutual fund is a company that pools money from shareholders and invests it in securities such as stock, bonds, and cash equivalents. The number of securities in an open end mutual fund may range from as few as 25-50 to as many as a few hundreds. When you buy shares in an open end mutual fund, you own a portion of the securities held in the fund. As the securities move up and down, the price of your mutual fund changes accordingly.

When you buy mutual funds, you do not own the underlying securities

Unlike buying stocks and bonds, when you buy mutual funds, you only own a portion of the shares of underlying securities. You do not own the securities themselves. For example, if you buy Microsoft shares (MSFT), then you will own Microsoft shares. If you buy a mutual fund that invests in Microsoft shares, you will not own Microsoft shares. This is because, when investing in mutual funds, you are investing in a portfolios that mutual funds managers manage. That means, if mutual fund managers no longer like Microsoft shares, then they will sell those shares. You, as an investor, will not have a say in what securities the mutual fund should include. The mutual funds own the shares, not individual investors.