Mike DeWees, age 16, of Longview, Wash., for his question:
WHAT IS A MUTUAL FUND?
A mutual fund is a form of management investment company that combines the money of its shareholders and invests those funds in a wide variety of securities. Mutual funds provide the investor with professional management of funds and diversification of investment among the securities of many corporations.
Most mutual funds are classed as open end funds, meaning that the fund will redeem outstanding shares immediately upon request. Thus, the number of shares of a given mutual fund is not fixed, but fluctuates as new shares are sold to investors and outstanding shares are redeemed.
A recent trend among investment companies established as open end funds has been toward suspending the issuance of new shares when assets reach a predetermined level. Such funds become unlisted over the counter securities. A prospective investor can then buy shares only from a shareholder who wishes to sell. The purpose of such liwitation of assets is to keep the mutual fund relatively small and thus to facilitate the management of the securities in the portfolio.
Closed end funds generally have a fixed number of shares outstanding and are traded in some instances on stock exchanges. Share are purchased and sold at the market price plus a commission. They may sell at a premium, that is, above the value of their assets, or at a discount, below the value of their assets.
Mutual funds are classed according to their investment objectives: long term growth of capital and income, stability of capital or current income.
In pursuit of the investment objective, some funds emphasize common stocks either of the "blue chip" variety or of so called growth companies. Others specialize in stocks of companies within a single industry or group of industries.
Other types of funds invest solely in preferred stocks or in bonds.
Open end mutual funds maybe sold by securities dealers and brokers, by a sales staff employed by the fund management, or directly by the fund to the investor. The last named process carries no sales charge, or a purely nominal one, and such funds are called no load.
The offering price and redemption price of a mutual fund are based on the market value of the securities in its portfolio. The offering price, except in the case of no load funds, includes a sales charge, which covers a management fee and a commission to the broker. Redemption is usually at the current net asset value.
Shareholders of mutual funds receive investment income dividends derived from dividends and interest earned on securities in the portfolio. Capital gains distributions are made when and if long term gains are realized on the sale of securities in the portfolio.
Income dividends are paid quarterly or semiannually. Capital gains distributions are usually made annually, toward the end of the fiscal year of the fund.
Mutual funds are regulated by federal and state laws.