Financial Markets For The Rest Of Us|
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
fund's snapshot or profile, which conveys some key points about the fund in one or two pages. The profile is not meant to be a replacement for a fund's prospectus, but it can be used effectively to filter out funds based on certain criteria while searching for that perfect fund to invest in. It is certainly a good place to start.
Funds can be classified in numerous ways depending on the criteria used. Here we will cover standard fund classifications from several angles. Keep in mind that a fund could fall within several of these classes simultaneously. For example, a fund could be an actively managed fund as well as a growth equity (stock) fund.
Open-End Versus Closed-End
In very broad terms, funds come in two flavors, open-end and closed-end. Open-end funds are the kind most of us are familiar with and are much more popular than their closed-end counterparts. Open-end funds work by assembling a pool of securities and then offering it to the public in the form of shares. An open-end fund could start out with small net assets and as more investors buy into the fund it simply grows. Technically speaking, an open-end fund has an unlimited source of shares. The more people buy into the fund the more money flows into the fund, which is used to buy more investments in exactly the same proportions as before, and new shares are issued on demand. Unlike stocks, where supply and demand play a role in their share prices, with an open-end fund's unlimited supply of shares, its NAV hardly moves in response to fluctuations in demand for the fund. Remember that NAV is based on the value of the underlying securities, not the demand for a fund's shares. The fund's net assets, however, increase by the amount of the newly arrived money. It should be noted …
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