There are three main types of investment companies, including open-end funds, closed-end funds, and the Unit Investment Trust (UIT). A mutual fund is legally termed as an “open-end” company. In the most basic sense, a mutual fund company pools money from different investors, and it invests the money in bonds, stocks, short-term money markets, and other types of securities. The combined holdings in the mutual fund are known as the portfolio. Each investor represents an interest in this portfolio, and he or she can derive appropriate income from the funds it generates.

Some of the distinguishing features of mutual fund include:

Investors buy shares from the fund itself rather than from other investors in the secondary market (NASDAQ Stock Market, New York Stock Exchange, etc.)

The amount that the investor pays for the fund shares is the actual per share net value (NAV) plus the shareholder fees, which the fund company may charge at the time of purchase.

Shares can be “redeemable”. This means that investors can sell their mutual fund shares back to the fund or to the fund’s broker.

Generally, mutual funds create new shares to accommodate new aspiring investors. In short, they sell shares on a continual basis, except in the case when the funds become too large.

Mutual fund investment portfolios are managed by entities referred to as “investment advisers”. These investment advisers are registered with the Securities and Exchange Commission.

It is important to tackle hedge funds as well. Hedge funds are usually mistaken as mutual funds, but it is important to remember that hedge funds are not subject to legal regulations that pertain to mutual funds. Hedge funds are unregistered and private investment pools that are usually limited to wealthy and sophisticated investors.