Mutual funds were created to enable small investors to invest in diversified and structured portfolios of stocks and bonds in an affordable way that would otherwise not be available to them. Since a portfolio of stocks needs to have at least 30 stocks or more, and much more is better, in order to achieve diversification. When mutual funds were created the costs of trading stocks in terms of broker fees and buy sell spreads on small quantities added significant and effectively prohibitive premiums for small investors making the whole deal too expensive unless it was for some kind of speculative venture. Mutual funds are bought and sold by the institution issuing the fund. A mutual fund is either open-end or closed-end. A closed-end mutual funds is issued with an IPO which means an Initial Public Offering and the number of shares in the fund does not change. The price of the shares is determined by supply and demand. An open-end mutual fund sets the fund price on the basis of the assets in the fund. If someone buys more shares in an open-end fund the fund manager has to acquire more of the underlying assets i.e. either stocks or bonds. If someone sells some of their shares in an open-end fund the fund manager has to sell some of the underlying stocks or bonds. Open-end funds will charge clients a commissions, referred to as a load to buy or sell shares in the fund. Since buying and selling shares in a closed-end mutual fund is determined by market conditions there is no load added as a cost of transaction. In today’s world with electronic trading, much higher trading volumes and many more investors in the markets, one of the original reasons for mutual funds is no longer strictly a consideration, though it is still a good way for a small investor to get started. Mutual funds are still very relevant in personal finance today because of the expertise of the fund managers.
