Curious Cat Investing Dictionary: Open End Mutual Funds

Open End Mutual Fund - A mutual fund with shares bought and sold by the fund itself. An investor invests by sending the fund company a check which then calculates the Net Asset Value at the close of business that day and credits the investor with the appropriate number of shares. When the investors sells their shares, the fund company redeems the shares and calculates the amount owed based on the Net Asset Value.

An open end fund has the additional difficulty of coping with purchase and sales decisions by investors. When investors sell, the fund must pay them cash which can cause the fund to be forced to liquidate some investments the fund holds if more investors sell than the fund was anticipating. They also must invest new money sent in by investors. An open end fund can be closed to new investments (which means investors are not allowed to buy new shares), however it is still classified as an open end fund.

Open end mutual funds are most often invested in stocks though they can also be invested in bonds. Mutual funds normally have a guiding investment focus such as: sector funds (health care, internet, retail, small capitalization...). Then can also be geographic, investing in stocks based in for example: Europe, USA, Asia or emerging markets. Money market funds are a specific type of open end mutual funds (though they are not thought of as that normally).

  • Closed End Fund - An investment fund that trades like other stocks. The price is determined by the marketplace. If the price is above net asset value the fund is said to trade at a premium. If the price is less than the net asset value the fund is said to trade at a discount (normally funds trade at a small [5-10%] discount to net asset value).
  • Index Fund - fund that seeks to mirror the results of an index such as the S&P 500 Index, the Wilshire 5000 Index or the FTSEurofirst. Since the fund merely tries to mirror the makeup of the index the costs of analysts etc. are avoided and index funds benefit from a lower expense ratio.
  • Net Asset Value (NAV) - Total assets minus total liabilities then divided by the total number of outstanding shares. The NAV is calculated daily by the funds.
  • Front End Load - an open end mutual fund with a sales fee (normally to pay salespeople, stock brokers, etc.). The "load" is a percentage of total purchase price and often declines with larger invested amounts.
  • Back End Load - an open end mutual fund with a sales fee (normally to pay salespeople, stock brokers, etc.). The "load" is charged to the investor when they sell rather than they buy. It is calculated as percentage of total sales price.
  • 12b-1 fees - an open end mutual fund with a sales fee (normally to pay salespeople, stock brokers, etc.). This fee is a percentage of total value. Often it is charged on funds without front end loads (to provide payment to salespeople and stock brokers without having to make the sales charge as visible to the customer).
  • Money Market Fund
  • Exchange Traded Fund
  • Inverse Funds - ETFs that aim to act as short positions would. For example if the index they target declines 1% the inverse fund would increase 1%
  • Hedge Fund - private investment partnerships (exempt from SEC rules for mutual funds). Normally hedge funds take aggressive, often speculative and leveraged investment strategies but that is not required to be a hedge fund. Often the fund managers are paid performance fees, taking a significant percentage of gains. They are only open for investments from wealthy investors (over $200,000 in income and net worth of over $1 million).
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