Because of the pricing/trading mechanisms used with mutual funds, they cannot be bought and sold like stocks. When trading stocks, an investor can place limit orders, engage in short selling, buy on margin and make trades in the secondary market throughout the day.

Mutual fund shares, on the other hand, are issued to buyers and redeemed from sellers directly by the fund company. Fund share prices are determined once a day after the close of business and are based on the closing prices of the underlying securities in the fund's portfolio. Fund share buy and sell prices are not posted until the day after the transactions occur. A mutual fund's net asset value per share reflects this type of pricing.

Because of these limitations with conventional mutual funds, exchange-traded funds, which are index mutual funds structured and listed as stocks, were originally created in response to professional traders' desire to trade funds with the same facility as stocks.

For related reading, see Introduction To Exchange-Traded Funds.

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  5. How do mutual funds work in India?

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