Understanding Mutual Funds

03/30/07 - 01:24 PM EDT

Scott Rothbort

Closed-End Funds vs. Open-End Funds

Mutual Funds take one of two structures:

1. Closed-end funds have a fixed amount of shares, just like a public corporation. Shares are typically traded on a stock exchange or market like the Nasdaq. Closed-end funds are transacted based on a market price as determined by a bid/offer auction system. Investors may be subject to a commission charge from their brokers to buy or sell such funds.

2. Open-end funds are funds by which the fund sponsor constantly issues and redeems shares based on demand to buy or sell by investors. Open-end funds are transacted at the net asset value adjusted for other transaction charges (see below).

Important Mutual Fund Terminology

Here is a list of common terms that you will encounter as you navigate the mutual fund landscape:

Net Asset Value (NAV): This represents the book value per mutual fund share. Put simply, it represents the difference of assets minus liabilities, divided by total shares. Open-end funds are transacted and quoted at NAV (adjusted for fees).
Premium: A price paid or quoted in excess of NAV for a closed-end fund. The premium is typically expressed in percentage terms of NAV.
Discount: A price paid or quoted in less than that of NAV for a closed-end fund. The discount is typically expressed in percentage terms of NAV.
Family of Funds: A fund sponsor that has a multitude of mutual funds available for investors to select from. These funds vary by sector, weighting, asset allocation or asset class. There are many mutual fund families out there. Some of the most recognizable ones are Fidelity Investments, Putnam, Dreyfus, T. Rowe Price (TROW - Cramer's Take - Stockpickr), Legg Mason (LM - Cramer's Take - Stockpickr) and Blackrock(BLK - Cramer's Take - Stockpickr).
Load: Sales charges that are paid by open-end mutual fund investors when they buy or sell shares. Loads come in many variations and I have devoted an entire section to mutual fund loads below. These are typically quoted as a percentage of NAV.