MUTUAL FUNDS and ETFS A Guide for Investors

MUTUAL FUNDS and ETFS A Guide for Investors

How Mutual Funds and ETFs Work 
How Mutual Funds Work
A mutual fund is an SEC-registered open-end investment 
company that pools money from many investors and invests 
the money in stocks, bonds, short-term money-market instru-

ments, other securities or assets, or some combination of 
these investments. The combined securities and assets the 
mutual fund owns are known as its portfolio, which is managed 
by an SEC-registered investment adviser. Each mutual fund 
share represents an investor’s proportionate ownership of the 
mutual fund’s portfolio and the income the portfolio generates. 
Investors in mutual funds buy their shares from, and sell/
redeem their shares to, the mutual funds themselves. Mutual 
fund shares are typically purchased from the fund directly or 
through investment professionals like brokers. Mutual funds 
are required by law to price their shares each business day and 
they typically do so after the major U.S. exchanges close. This 
price—the per-share value of the mutual fund’s assets minus 
its liabilities—is called the NAV or net asset value. Mutual funds 
must sell and redeem their shares at the NAV that is calculated 
after the investor places a purchase or redemption order. This 
means that, when an investor places a purchase order for 
mutual fund shares during the day, the investor won’t know 
what the purchase price is until the next NAV is calculated.

Types of Investment Companies
There are three basic types of investment companies:
Open-end investment companies or open-end 
funds—which sell shares on a continuous basis, 
purchased from, and redeemed by, the fund (or 
through a broker for the fund);
Closed-end investment companies or closed-end 
funds—which sell a fixed number of shares at one 
time (in an initial public offering) that later trade on 
a secondary market; and 
Unit Investment Trusts (UITs)—which make a one-

time public offering of only a specific, fixed number 
of redeemable securities called units and which will 
terminate and dissolve on a date that is specified at 
the time the UIT is created.
Mutual funds are open-end funds. ETFs are generally 
structured as open-end funds, but can also be struc-

tured as UITs. ETFs operate pursuant to SEC exemptive 
orders. 

MUTUAL FUNDS and ETFS A Guide for Investors