One of the most popular ways to achieve investment objectives is with mutual funds. They are a great way to get started in investing and can continue to play a role in your portfolio throughout your life. The Society of Louisiana CPAs provides some basic information about how mutual funds work.

A mutual fund is a portfolio of stocks, bonds, or money market funds that is managed on behalf of investors who share ownership. Each fund has an investment objective and a professional manager. With a mutual fund, investors can attain a diversified portfolio for much less than they could by buying individual stocks, bonds.

Mutual funds are very liquid, meaning you can convert them into cash should the need arise. Most mutual funds offer automated reinvestment programs. All funds are either open-end or closed-end funds. In an open-end fund there is no current limit to the number of shares that can be issued. On an ongoing basis, shares are available to both existing and new investors. Open-end funds typically are bought and sold directly through the fund company. A closed-end mutual fund has issued only a fixed number of shares that must be bought through a broker at a price that fluctuates in response to the fund’s performance and investor demand for the fund.

The net asset value (NAV) is the dollar value of one share in the fund and represents the price at which you can buy and sell shares. An NAV is calculated at the end of every trading day by dividing the number of shares outstanding into the total value of the portfolio.

There are three major categories – stock, bond, and money market. The stock category includes types of growth funds which focus on stocks that anticipate capital appreciation. Income funds are for investors whose primary objective is income while balanced funds contain stocks and fixed income securities (bonds). Then, there are sector funds which invest in a particular sector such as technology or health care, and index funds that buy shares of every stock in a particular index, such as the S&P 500. There are also numerous types of bond funds.

Finally, money market mutual funds have become useful both as a cash management tool and as a place to “park” funds between investments.

Sales Charges

A mutual fund may be either a load or a no-load fund. A load mutual fund charges you for the number of shares you buy plus a sales fee or commission. The fee, called a sales load, may be charged for buying into the fund (a front-end load) or selling the fund (a back-end load). This fee varies, but is usually in the range of 3 to 8 percent of the purchase price, with most funds charging about 5 percent. A no-load fund sells its shares without a commission or sales charge.

Management Expenses

To cover the cost of management and other expenses, all mutual funds charge an annual administrative fee of 0.5 percent or more.

Before You Buy

Every mutual fund issues a prospectus, which describes the fund’s investment policies and objectives, risks, costs,historical performance data, and other pertinent information. CPAs recommend that you carefully read the prospectus before you invest in any fund.