A:

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.

RELATED FAQS
  1. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  4. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  5. What action is the SEC likely to take on 12b-1 fees?

    The Securities and Exchange Commission (SEC) may take action to impose greater regulation on how 12b-1 fees are used, or ... Read Full Answer >>
  6. What is considered a reasonable 12b-1 fee?

    A reasonable 12b-1 fee is generally considered to be 0.25% of the assets of the mutual fund. The maximum amount allowed for ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
  6. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  7. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
  8. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI South Africa

    Learn more about the iShares MSCI South Africa fund, which is an NYSE-listed exchange-traded fund offered and managed by BlackRock.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P 600 Small Cap Growth

    Learn more about the SPDR S&P 600 Small Cap Growth ETF, a highly efficient fund that tracks small-cap equities in the United States.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

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

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

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

    A distribution of a portion of a company's earnings, decided ...
  5. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  6. Historic Pricing

    A method for calculating the value of an asset using the last ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!