Mutual funds have been in existence since 1924, when the first open-ended mutual fund was created. Since then, the market has grown from having less than $10 million in combined assets to having nearly $10 trillion in combined assets in 2006. Mutual funds are a well-diversified portfolio of investments that include equities, bonds and other securities. Mutual funds have become increasingly popular among investors saving for retirement because of the low risk that they carry, along with their reputation of providing consistently positive long-term returns.

Under the broad category of mutual funds there are three main types, open-end funds, closed-end funds and exchange traded funds (ETFs). The value of a fund is quoted as the net asset value (NAV) of the fund. The NAV for a fund is calculated by taking the total assets of the fund and deducting the total liabilities of the fund. NAV is usually divided by the total shares outstanding for the fund, resulting in NAV per share. This per-share value is, in essence, the price investors must pay for the mutual fund.

In open-end funds, the NAV per share is recalculated at the close of every trading day. This is done because the value of the assets and liabilities underlying the funds are constantly changing. Closed-end funds usually trade at a premium or discount to their NAVs. There are three reasons why this may occur: pressure of supply and demand, fund management and expectation of asset performance. Just like stocks, shares of ETFs are bought and sold in the secondary market every day. Subsequently, the price of an ETF will change throughout the trading day.

When your mutual fund takes a profit, you are realizing capital gains on your investments. When this occurs, all of the capital gains earned on the investment are distributed among the investors in the fund. Because the fund has sold some of its underlying stock and has paid out all of the capital gains to investors, its total assets will decrease. Finally, when the assets of the fund decreases - so does the fund's NAV per share.

To learn more, see the Mutual Fund Basics Tutorial, The ABCs of Mutual Fund Classes and The Truth Behind Mutual Fund Returns.

  1. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  2. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  3. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  6. When are mutual fund orders executed?

    Whether buying or selling shares of a fund, mutual fund trades are executed once per day after the market close at 4 p.m. ... Read Full Answer >>
Related Articles
  1. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  2. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  3. Mutual Funds & ETFs

    American Funds' Top Funds for Retirement

    Planning for retirement in this economic and investment environment is far from easy. American Funds might offer an answer.
  4. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  5. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  6. Mutual Funds & ETFs

    The 8 Most Popular Vanguard Funds for a 401(k)

    Learn about some of the mutual funds in Vanguard's lineup that are popular among 401(k) investors, and find out why you should consider them.
  7. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  8. Mutual Funds & ETFs

    Best 3 Vanguard Mutual Funds for Retirement

    Discover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
  9. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  10. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  1. Benchmark

    A standard against which the performance of a security, mutual ...
  2. Alpha

    Alpha is used in finance to represent two things: 1. a measure ...
  3. Equity

    Equity is the value of an asset less the value of all liabilities ...
  4. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  5. Series 6

    A securities license entitling the holder to register as a limited ...
  6. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...

You May Also Like

Trading Center