A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter. Each investor in the fund gets a slice of the total pie. The money is then invested by a team of professionals, who research stocks, bonds or other assets and then place the money as wisely as they can.
The managers charge an annual fee -- generally 0.5% to 2.5% of assets -- plus other expenses. That puts a drag on your total return. But in exchange, you get professional direction and instant diversification.
Load vs. no-load
There are several kinds of mutual funds. Funds that impose a sales charge -- taking a cut of any new money that comes into the fund, or a cut of withdrawals -- are called load funds; those that do not have sales charges are called no-load funds.
Open- vs. closed-end funds
Open-end funds will sell shares to anyone who cares to buy. Their share price is determined by the value of the underlying investments and is calculated each evening after the close of the U.S. markets. The price for a share of a open-end fund is determined by the net asset value, or NAV, which is the total value of the securities the fund owns divided by the number of fund shares outstanding. The NAV is the price at which you can buy and sell shares, as long as you don't have to pay a sales commission, or load.
Closed-end funds, on the other hand, issue a limited number of shares that then trade on the stock exchange like stocks. The price of such shares can fluctuate above or below the actual value of the underlying shares held within the portfolio.