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CHAPTER 5

Whereas, if you own a shopping mall and one store goes bankrupt, you still have income flowing from all the other stores within the mall. That’s the way mutual funds are. By owning a mutual fund rather than the stock of one company, you are less likely to realize any major loss, should a company go out of business. So, if you own $10,000 of the common stock of XYZ Corporation and it goes bankrupt, you lose your investment. But, if you own $10,000 in the ABC Growth Fund, which has invested in shares of XYZ Corporation, and XYZ goes belly up, the value of your mutual fund decreases. But you won’t lose your entire investment because the risk is spread out.

WHAT IS A MUTUAL FUND?

Mutual funds are investment companies. There are three main types of investment companies:

  • 1.

    Unit investment trusts. (Here the fund invests strictly in a fixed portfolio of securities.)

  • 2.

    Those who sell face-amount certificates. (Here the company pledges to pay the investor a specified amount upon maturity or a surrender value if sold early.)

  • 3.

    Management companies. It’s the management companies that are the commonly used of the three. While both closed-end and open-end (or mutual) funds fall under the heading of management companies, most people are familiar with the open-end fund.

CLOSED-END MUTUAL FUNDS

Closed-end mutual funds are somewhat similar to corporations because they issue fixed numbers of shares. This doesn’t fluctuate, with the exception of when a new stock may be issued. The funds may issue bonds or preferred stock to support the common share- holders’ positions. They then use their capital and other resources to invest in other companies’ securities. Closed-end funds are not nearly as common as open-end funds.

Closed-end funds’ shares are bought and sold at market like other mutual fund shares and shares of stock. Their prices are dependent

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