Open Versus Closed

• Mutual funds operate as either open-end or closed-end funds. You can buy shares in an open-end fund at any time and sell your shares back to the mutual fund company whenever you desire. You can only buy shares directly from a closed-end mutual fund during the initial public offering. After the IPO, shares of closed-end mutual funds trade like stocks and you can buy shares from other investors or sell your existing shares on the open market.
  
  

Funds

• The share prices of mutual funds are driven by the value of the underlying securities. At the end of the business day, fund managers calculate the total value of the fund's portfolio of investments by adding up the market value of the individual securities as of the close of the market. Fund managers then divide the total value of the mutual fund among the number of fund shares to determine the price per share. Mutual fund trades occur after the stock market closes, so buyers and sellers do not know how much they will pay or receive until the trades have been executed.
  
  

Fees

• Mutual fund companies generate profits and cover operating expenses by charging fund management fees that are deducted from each shareholder's investment every year. Every fund company must detail its operating fees in the fund prospectus, and these fees are referred to as the expense ratio and shown as a percentage of the fund's assets. Additionally, you often have to pay a commission when you buy mutual fund shares. Some shares have an upfront fee known as a front-load, while other shares have a redemption fee known as a back-end load. So-called no-load funds charge no purchase or redemption fees, but you often have to pay the transaction fee when you buy or sell these shares.
  
  

Benefits

• Mutual funds appeal to people who are nervous about the risks of investing their money in one type of stock, bond or other security. Every fund contains many different types of securities; this means investors are protected through the diversity the fund provides, because the chances of all of the securities losing all value simultaneously are minimal. Nevertheless, marketable securities are not principal protected and mutual funds must disclose the risks to potential investors. Stock-heavy funds expose investors to more volatility and offer greater growth potential, whereas income funds pay regular dividends but have less price fluctuation; that makes these funds attractive to more conservative investors.