The mutual funds with which you’re probably familiar are called “open-end” because they are constantly buying and selling new shares. You purchase shares from the fund; you sell shares to the fund.
The trading price is always the “net asset value per share”. In essence, all of a fund’s assets (chiefly, stocks, bonds, and cash) are added up, using current market prices. Liabilities, if any, are subtracted. The resulting number is divided by the number of shares outstanding, to get NAV per share, which is the selling and redemption price.
Suppose, for example, Mutual Fund ABC holds shares in 20 different companies, valued at $30 million at current market prices plus $5 million in cash with no debt. There are two million shares outstanding. With $35 million in net assets and two million shares, the NAV per share is $17.50.
Thus, if you want to buy more shares, you can buy them at $17.50 each. If you want to cash in, you can sell your shares to the fund (redeem them) at $17.50 each. This goes on indefinitely, although the NAV per share – the selling and purchase price – will fluctuate continually as the fund’s stocks or bonds gain or lose value.
– Open-end funds are excellent for flexibility
Many mutual funds allow you to invest with less than $1,000 and to make subsequent investments as low as $100, so you can build your stake each week, each month, or each quarter. Some funds offer special plans for periodic investing.
– Most mutual funds permit automatic reinvestment of dividends.
If you reinvest your dividends, rather than spend them, you’ll enjoy long-term growth.
– There are hundreds of mutual funds from which to choose.
You likely can find a fund to suit your specific needs. If you want to buy health-care stocks, Ginnie Maes, or government bonds from around the world, just to mention a few categories, there’s a mutual fund for you.
– With a mutual fund, you can always buy or sell at the fair market value of the securities, so you have excellent liquidity.
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