If you ever thought about buying stocks or bonds but decided not to, your reasons were probably like most other people: You didn't know enough to make a good decision and you lacked enough money to diversify your investment among several choices. These same two reasons explain why people invest in mutual funds. By pooling your money with money from other investors, a mutual fund can do for you what you can't do on your own.

Specifically, a mutual fund is an investment alternative chosen by people who pool their money to buy stocks, bonds, and other securities selected by professional managers who work for an investment company, that, for a management fee, invests the pooled funds of small investors in securities appropriate to its stated investment objectives.

Let's begin with a basic concept: Mutual funds, like all potential investments, must be evaluated. An investment in mutual funds is based on the concept of opportunity costs. Simply put, you have to be willing to take some chances (risks) if you want to get larger returns on your investments. The major reasons investors purchase mutual funds are professional management and diversification.

Characteristics of Mutual Funds

A closed-end fund is a mutual fund whose units are issued by an investment company only when the fund is organized. As a result, only a certain number of units are available to investors. After all the units originally issued have been sold, an investor can purchase units only from another investor who is willing to sell them. Units of closed-end funds are traded on the floors of stock exchanges, and they are determined by the factors of supply and demand and by investor expectations.

An open-end fund is a mutual fund whose units are issued and redeemed by the investment company at the request of investors. An open-end fund puts no limit on the number of units the investment company can issue. Investors are free to buy and sell units at the net asset value plus a service charge. The net asset value per unit is calculated based on the current market value of securities contained in the mutual fund's portfolio minus the liabilities divided by the number of units outstanding.

The investor should compare the cost of investing in a mutual fund with the cost of other investment alternatives, such as purchasing stocks or bonds. With regard to cost, mutual funds are classified as load funds, low-load funds, or no-load funds. A load fund is a mutual fund in which investors

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