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A mutual fund (aka managed fund) enables investors to pool their money and place it under professional investment management. The portfolio manager trades the fund's underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. There are more mutual funds than there are individual stocks.

Net asset value: The net asset value, or NAV, is a fund's value of its holdings, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. Open-end funds sell and redeem their shares at the NAV, and so only process orders after the NAV is determined. Closed-end funds may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

Open-end fund:  In an open-end fund, the units of a mutual fund are bought and sold by the fund company. The price at which an investor buys the fund is usually higher than the price at which he sells the fund to the fund company. 

Closed-end fund:  Unlike the buying and selling of funds conducted by the fund company in an open-end fund, the units of close-end funds are traded on a stock exchange. 

Dividend option:  The fund earns income from the profit it makes from investing in securities as well as from earning dividends on those securities. Fund companies offer investors the option of earning some of the earnings by way of dividends and reducing the NAV (Net Asset Value) of the fund proportionally by the dividend amount. 

Growth option:  The fund earns income from the profit it makes from investing in securities as well as from earning dividends on those securities. In growth option, the investor leaves the earned profits in the mutual fund, which gets invested in earning more returns. 

Equity Fund:  An equity fund invests most of its assets in stocks/shares of listed companies. The fund earns returns from investing in stocks in the form of capital gains (the difference between buying and selling stocks) as well as dividends earned from these investments. Risk attached to an equity fund is the highest amongst all mutual funds.

Debt Fund/Income Fund/Bond Fund:  Such a fund invests in interest bearing securities mainly government securities and corporate bonds. This fund earns returns for its investors from interest income on its investments and profits on trading securities. In terms of risk, this type of fund is the least risky. There is also another category of fund called "Liquid Funds" which servers the need of very short term investing. 

Load: A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares are purchased, taken as a percentage of funds invested. The value of the investment is reduced by the amount of the load. Some funds have a deferred sales charge or back-end load which is paid to the broker out of the proceeds when shares are redeemed. (This is distinct from a redemption fee, which is also paid out of proceeds, but is kept by the fund. Many funds charge redemption fees when shares are sold a short time after they are purchased, to discourage investors from market timing.) Load funds are sold through financial intermediaries such as brokers, financial planners, and other types of registered representatives who charge a commission for their services.

It is possible to buy many mutual funds directly from the fund sponsor, without paying a sales charge. These are called no-load funds. Some discount brokers will sell no-load funds, sometimes for a flat transaction fee or even no fee at all. (This does not necessarily mean that the broker is not compensated for the transaction; in such cases, the fund may pay brokers' commissions out of "distribution and marketing" expenses rather than a specific sales charge.)

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