A mutual fund is a type of professionally managed investment fund that pools money from many investors to purchase securities. While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies". Hedge funds are not mutual funds, primarily because they cannot be sold to the general public.
Types of Mutual Funds
There are three principal types of mutual funds in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds. exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange; they have gained in popularity recently. ETFs are one type of "exchange-traded product". While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-and closed-end funds.
Open-end mutual funds must be willing to buy back their shares from their investors at the end
of every business day at the net asset value (NAV) computed that day. Most open-end funds also sell shares to the public every day; these shares are also priced at NAV. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation. There is no legal limit on the number of shares that can be issued.
Open-end funds are the most common type of mutual fund. At the end of 2013, there were 7,707 open-end mutual funds in the United States with combined assets of $15 trillion.
Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from NAV. It may be at a "premium" to NAV (i.e., higher than NAV) or, more commonly, at a "discount" to NAV (i.e., lower than NAV). A professional investment manager oversees the portfolio, buying and selling securities as appropriate.
At the end of 2013, there were 599 closed-end funds in the United States with combined assets of
Unit investment trusts
Unit investment trusts (UITs) can only issue to the public once, when they are created. UITs generally have a limited life span, established at creation. Investors can redeem shares directly with the fund at any time (similar to an open-end fund) or wait to redeem them upon the trust's termination. Less commonly, they can sell their shares in the open market. Unit investment trusts do not have a professional investment manager; their portfolio of securities is established at the UIT's creation and does not change.