Thursday, December 18, 2008

Mutual fund

Mutual funds permit investors to acquire a pro-rata share of a diversified portfolio of securities. Part of the popularity of mutual funds is their ability to offer small investors some of the advantages otherwise limited to large investors: diversification of the portfolio and professional portfolio management. An investment in a mutual fund is actually the purchase of shares in a fund. The shares are purchased at a public offering price, which is the net asset value of a share in the fund at the time of purchase, plus, in some cases, a sales charge or commission. It should be noted that a common trust plan is a mutual fund.

Mutual funds and common trusts are usually open-end investment companies because they stand ready to sell the public as large a volume of shares as it wishes to buy. Whatever volume of money is drawn in is invested according to the formula or policy of the particular fund. When investors wish to cash in their shares, the fund sells a part of its portfolio to raise the money. It then pays off the investor on the basis of the value of its assets at the date of liquidation. In effect, you buy $1,000 worth of shares in the fund and, when you sell your interest, you receive your proportionate share of the value of the fund's assets at the time of the sale. Therefore, you may realize a gain or a loss on your original investment.

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