Mutual Funds 101

A big buzzword for investing is diversity. With mutual funds, the diversity is baked right in! A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.

Increased diversification is one of the appealing advantages of mutual funds. The fund will diversify among many securities, decreasing risk relative to investment in individual securities. Mutual funds are classified as either open-end or closed-end.

Closed-end funds have a set number of shares issued to the public through an initial public offering. These shares trade on the open market; this, combined with the fact that a closed-end fund does not redeem or issue new shares like a normal mutual fund, subjects the fund shares to the laws of supply and demand. As a result, shares of closed-end funds often trade at a discount to net asset value or NAV—a fund’s asset minus the value of its liabilities per unit. (There were 530 closed-end funds in the U.S. at the end of 2016, with combined assets of $300 billion, or 1 percent of the U.S. industry.)[i]

Open-end funds make up a majority of funds. In the most basic sense, an open-end fund does not have a set number of shares. Instead, the fund will issue new shares to an investor based upon the current net asset value and redeem the shares when the investor decides to sell. Open-end funds always reflect the net asset value of the fund’s underlying investments – because shares are created and “destroyed” as necessary. (The U.S. industry included 8,066 open-end funds at the end of 2016, with combined assets of $16.3 trillion, accounting for 86 percent of the industry.) [ii]

Mutual funds are actively managed by a professional money manager who–for a fee–constantly monitors the stocks and bonds in the fund’s portfolio. Because this is his or her primary occupation, it is possible to devote considerably more time to selecting investments than an individual investor. It provides the peace of mind that comes with informed investing without the stress of analyzing financial statements or calculating financial ratios.

Through a broker, you can purchase mutual fund shares as you would a stock. There may be a minimum initial investment, as well specific options and strategies to consider. Contact Ambassador Advisors for more information about mutual funds, their alternatives, your goals and objectives, and to set up an investment plan.

[i]2017 Investment Company Fact Book. Investment Company Institute.

[ii]2017 Investment Company Fact Book. Investment Company Institute.

 
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