A mutual fund is an investment company that purchases a pool of securities. A mutual fund share represents partial ownership of the fund's holdings. Mutual funds rise and fall in value based on price fluctuations involving the underlying securities. When you redeem your shares, you basically sell the shares back to the mutual fund company. In some instances, you may have to pay a sales charge when you redeem your shares, while in other instances no charges are assessed. Redemption rules differ between funds termed open-ended funds and those designated as closed-end funds.
An open-ended mutual fund has no preset end date. You can buy shares directly from a mutual fund company or use a broker as an intermediary. You cannot sell shares in open-ended funds on the secondary market. Open-ended mutual funds are priced daily after the close of the New York Stock Exchange. The overall value of the fund is calculated by adding together the value of the underlying securities as of the end of the trading day. You determine the Net Asset Value of each share by dividing the fund's total worth by the number of outstanding shares. It normally takes a few days for the fund company to disburse the sale proceeds, either in the form of a check or as an electronic transfer.
Open-ended mutual funds commonly assess a sales charge known as a load that you pay either when you buy or redeem your shares. On A class shares, you pay the sales charge at the time of purchase. B and C class shares cost nothing up front, but have a deferred contingent sales charge or back-end load. On a B share the load decreases from one year to the next, and you pay nothing if you redeem shares you have owned for at least seven years. On C shares you typically pay the redemption charge only on shares you have owned for less than a year. The sales charge is always assessed as a percentage of the value of your redeemed shares rather than as flat dollar fee.
No-load funds are open-ended mutual funds that do not assess sales charges or loads. However, redemption is not necessarily free, because the Securities and Exchange Commission regards charges and fees as two different things. A sales charge is basically a commission that a broker earns for conducting a transaction. If no broker is involved, the fund company keeps the money earned from sales charges. A fee is an operating cost that you may have to pay when you buy or sell shares. No-load funds often assess transaction fees that you pay when you buy or redeem shares. Unlike sales charges, redemption fees are normally fixed-fee costs rather than charges based on the value of the shares you redeem.
A closed-end mutual fund is an investment company that creates a pool of assets and sells shares just once during an initial public offering. Closed-end funds often hold illiquid securities such as real estate assets or long-term debt instruments. Generally you cannot redeem shares in a closed-end fund, although fund companies sometimes allow redemptions at set intervals during the investment term. You can sell your shares on the open market, since shares in closed-end funds trade similarly to stocks. You may pay a trading fee as opposed to a sales charge when you sell your shares. Rather than being valued at the end of the business day, the price per share is based upon the value of the fund's assets at the time you conduct the trade as well as market forces such as supply and demand.