Investors face risk no matter where they put their money, but some investment products include traits to minimize that risk. Mutual funds are one example, pooling money from investors who buy shares and investing it in a broad range of products. Although this combines the risks of loss for all of the assets, it also causes mutual fund prices to change as markets fluctuate.
Mutual Fund Pricing
The price for buying into a mutual fund depends on the value of the fund's assets. Net asset value, or NAV, refers to the total value of a mutual fund's assets, including stock prices, bond rates and the amount of cash reserves the fund holds, divided by the number of outstanding shares. NAV for a mutual fund changes from day to day at the close of trading on the major American stock exchanges.
Even though mutual fund prices rely directly on the values of the assets they hold, market fluctuations do not necessarily translate directly into fund price changes. Some mutual funds are actively managed, which means fund managers continually buy and sell assets within the fund. As markets trend downward, mutual fund managers protect fund prices by selling assets that are poised for decline, and buying those that have growth potential. An effective mutual fund manager can cause a fund's price to rise even if markets lose value over the same period.
Types of Mutual Funds
The change in price of a mutual fund based on market fluctuations depends, in part, on the type of mutual fund. Some mutual funds invest in specific sectors of the economy, and others take a broader approach and invest in many areas. For example, some mutual funds invest heavily in manufacturing companies. If unemployment rises and manufacturers report decreased earnings, this type of mutual fund's price would fall more sharply than that of a fund that invests in technology, health industry and financial service stocks as well as manufacturing stocks.
Another important aspect of mutual fund pricing is the cost of investing. Even though mutual funds sell their shares directly to investors instead of listing them on markets, some use brokers to handle transactions. This means fees for investors who buy into the fund. Mutual fund investors also pay management fees for as long as they hold their shares. These fixed prices are present regardless of how markets, and the specific mutual fund, are performing.
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