how do mutual funds work

A mutual fund is a company that collects money from many investors and invests that money in stocks, bonds, short-term money-market instruments, or other securities. Investing in a mutual fund allows you to distribute your investment dollars with other investors to share in the ownership of a widespread portfolio of stocks, bonds or other securities managed by financial professionals. For a relatively small initial contribution, you're able to participate in the potential long-term rewards of investing, without the expertise and time commitment required to track the performance of many separate investments. The overall risk is lesser (not zero) in this case.

A mutual fund company is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities. When you invest in a mutual fund, you are buying shares of the mutual fund and become a shareholder of the fund. Here you have lesser risk and the advantage of a fund manager who will be an expert in this field. The risk is lesser as the net result is the total of several share values that may vary in much different way.

open-end mutual fund company:

An open end mutual fund company means that the company will buy the fund at the end of every day from the holders who want to leave the mutual fund. Most of the mutual funds comes in this category.

closed-end mutual fund company:

On the other hand is almost closed after the issue. This can be for a certain period of time.

Unit Investment Trusts

no-load funds

low-load funds

Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, who also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options. However, despite the professional management, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.