Mutual Funds (Open-End Funds)

Mutual funds are the most common type of investment company. They pool money from many investors to purchase a diversified portfolio managed by professional investment advisers.

Net Asset Value (NAV)

The Net Asset Value is the per-share value of a mutual fund's holdings. It's calculated at least once daily (typically at 4:00 PM ET market close).

NAV Formula

NAV = (Total Assets - Total Liabilities) ÷ Shares Outstanding

Example:

• Fund assets: $500,000,000
• Fund liabilities: $5,000,000
• Shares outstanding: 25,000,000

NAV = ($500,000,000 - $5,000,000) ÷ 25,000,000 = $19.80 per share

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Forward Pricing

Mutual funds use forward pricing, meaning all orders (buy or sell) placed before the 4:00 PM ET cutoff execute at that day's closing NAV. Orders placed after 4:00 PM ET execute at the next business day's NAV.

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Investment Objectives

Mutual funds are categorized by their investment objectives:

Growth Funds

• Focus on capital appreciation
• Invest in growth stocks
• Little to no dividend income
• Higher risk, higher potential return

Income Funds

• Focus on generating regular income
• Invest in dividend-paying stocks or bonds
• Lower risk than growth funds
• Suitable for retirees

Balanced Funds

• Combine growth and income objectives
• Hold both stocks and bonds
• Moderate risk profile
• Diversification across asset classes

Index Funds

• Track a specific market index (S&P 500, etc.)
• Passively managed (lower fees)
• Aim to match, not beat, the index
• Low turnover

Money Market Funds

• Invest in short-term debt securities
• Aim to maintain $1.00 NAV
• Very low risk, low return
• High liquidity

Sector/Specialty Funds

• Focus on specific industries (technology, healthcare)
• Higher concentration risk
• Potentially higher returns

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Diversification Requirements

Under the Investment Company Act, a diversified fund must meet the 75-5-10 rule:

This rule applies to 75% of the fund's assets; the remaining 25% can be invested without these restrictions.

Exam Tip: NAV Calculation When calculating NAV, remember: Assets minus Liabilities, then divide by shares outstanding. The order matters—subtract first, then divide!