Closed End. One of the two types of managed investment companies, the closed-end investment company usually sells no additional shares of its own stock after the initial public offering. Therefore, their capitalizations are fixed unless a new public offering is made. The shares of a closed-end fund trade in the secondary markets (e.g.- on the exchanges) exactly like any other stock." To buy and sell, investors use their brokers, paying (receiving) the current price at which the shares are trading plus (less) brokerage commissions.

Because shares of closed-end funds trade on stock exchanges, their prices are determined by the forces of supply and demand. Interestingly, however, the market price is seldom equal to the actual per-share value of the closed-end shares.

Closed-end funds have been around for a long time; in fact, they were a popular investment before the great crash of 1929. After the crash, they lost favor and were relatively unimportant until they started to attract significant investor interest again following the crash of 1987.

Open-End Investment Companies (Mutual Funds)

Open-end investment companies, the most familiar type of managed company, are popularly referred to as mutual funds and continue to sell shares to investors after the initial sale of shares that starts the fund. The capitalization of an open-end investment company is continually changing-that is, it is open-ended-as new investors buy additional shares and some existing shareholders cash in by selling their shares back to the company. Mutual funds typically are purchased in either of two ways:

Mutual funds may be affiliated with an "underwriter," which usually has an exclusive right to distribute shares to investors. Most underwriters distribute shares through broker/dealer firms.

Mutual funds are corporations typically formed by an investment advisory firm that selects the board of trustees (directors) for the company. The trustees, in turn, hire a separate management company, normally the investment advisory firm, to manage the fund. The management company is contracted by the investment company to perform necessary research and to manage the portfolio, as well as to handle the administrative chores, for which it receives a fee.

Given the economies of scale in managing portfolios, expenses rise as assets under management increase, but not at the same rate as revenues. Because investment managers can oversee various amounts of money with few additional costs, management companies seek to increase the size of the fund(s) being managed. Many operate several different funds simultaneously. Investors can now choose from more than 400 mutual fund complexes (a fund complex is a group of funds under substantially common management).

Mutual funds are the most popular form of investment company for the typical investor. One reason is that the minimum investment requirements for most funds are small. Two-thirds of all funds require $1000 or less to get started, and 85 percent require $5,000 or less. For IRA and other retirement accounts, the minimum required is often lower. More on mutual froms from the SEC

Owners of fund shares can sell them back to the company (redeem them) any time they choose; the mutual fund is legally obligated to redeem them. Investors purchase new shares and redeem their existing shares at the net asset value (NAV), which for any investment company share is computed daily by calculating the total market value of the securities in the portfolio, subtracting any trade payables, and dividing by the number of investment company fund shares currently outstanding.

There are two major types of mutual funds:

Money market funds concentrate on short-term investing by holding portfolios of money market assets, whereas equity and bond & income funds concentrate on longer term investing by holding mostly capital market assets, such as stocks and bonds.

A major innovation in the investment company industry has been the creation, and subsequent phenomenal growth, of money market funds, which are open-end investment companies whose portfolios consist of money market instruments.

Created in 1974, when interest rates were at record-high levels, money market funds grew tremendously in 1981-1982 when short-term interest rates were again at record levels and investors seeking to earn these high short-term rates found that they generally could not do so directly because of the large denominations of money market securities. However, this situation has changed with the deregulation of the thrift institutions, and competition has increased dramatically for investors' short-term savings. Banks can now offer money market deposit accounts that pay competitive money market rates and are insured.

Money market funds can be divided into taxable funds and tax-exempt funds. 

Investors in higher tax brackets should carefully compare the taxable equivalent yield on tax-exempt money market funds with that available on taxable funds because the tax-free funds often provide an edge. Taxable money market funds hold assets such as Treasury bills, negotiable CDs, and prime commercial paper. Some funds hold only bills, whereas others hold various mixtures. Commercial paper typically accounts for 40 to 50 percent of the total assets held by these funds, with Treasury bills, government agency securities, domestic and foreign bank obligations, and repurchase agreements rounding out the portfolios. The average maturity of money market portfolios ranges from approximately one month to two months. SEC regulations limit the maximum average maturity of money funds to 90 days.

Tax-exempt money market funds consist of national funds which invest in short- term municipal securities of various issuers and state tax-exempt money market funds, which invest only in the issues of a single state, thereby providing additional tax benefits.

Investors in money market funds pay neither a sales charge nor a redemption charge, but they do pay a management fee. Interest is earned and credited daily. The shares can be redeemed at any time by phone or wire. Many funds offer check-writing privileges for checks of $500 or more, with the investor earning interest until the check clears."

Money market funds provide investors with a chance to earn the going rates in the money market while enjoying broad diversification and great liquidity. The rates have varied as market conditions changed. The important point is that their yields corresponded to current market conditions. Although investors may assume little risk because of the diversification and quality of these instruments, money market funds are not insured. Banks and thrift institutions have emphasized this point in competing with money market funds for the savings of investors. The board of directors (trustees) of an investment company must specify the objective that the company will pursue in its investment policy. The companies try to follow a consistent investment policy, according to their specified objective. Investors should purchase mutual funds on the basis of their objectives

Following is a listing of most major types of mutual funds:

Aggressive Growth Funds seek maximum capital appreciation (a rise in share price); current income is not a significant factor. Some funds in this category may invest in out-of-the-mainstream stocks, such as those of fledgling or struggling companies, or those in new or temporarily out-of-favor industries. Some of these funds may also use specialized investment techniques such as option writing or short-term trading For these reasons, these funds usually entail greater risk than the overall mutual fund universe.

Balanced Funds generally try to balance three different objectives: moderate long-term growth of capital, moderate income, and moderate stability in an investor's principal. To reach these goals, balanced funds in- vest in a mixture of stocks and bonds.

Corporate Bond Funds seek a high level of income by purchasing primarily bonds of U.S.-based corporations; they may also invest in other fixed-income securities such as U.S. Treasury bonds.

Flexible Portfolio Funds may invest in any one investment class (stocks, bonds, or money market instruments) or any combination thereof, depending on the conditions in each market. Because they do not limit a fund manager's exposure to any one market, these funds provide the greatest flexibility in anticipating or responding to economic changes.

Ginnie Mae or GNMA Funds seek a high level of in-come by investing primarily in mortgage securities backed by the Government National Mortgage Association.

Global Bond Funds seek a high level of income by investing in the debt securities of companies and countries 1 worldwide, including issuers in the United States. The funds' money managers deal with varied currencies, languages, time zones, laws, and regulations, and business customs and practices. Because of these factors, although global funds provide added diversification, they are also subject to more risk than domestic (U.S.) bond funds.

Global Equity Funds seek capital appreciation (a rise in share price) bv investing in securities traded worldwide, including issuers in the United States. These funds operate just like other global and international funds (see above), providing, added diversification but also added risk.

Growth and Income Funds invest mainly in the common stock of companies that offer potentially increasing value as well as consistent dividend payments. Such funds attempt to provide investors with long term capital growth and a steady stream of income.

Growth Funds invest in the common stock of companies that offer potentially rising share prices. These funds primarily aim to provide capital appreciation (a rise in share price) rather than steady income.

High-yield Bond Funds maintain at least two-thirds of their portfolios in non investment-grade corporate bonds (those rated Baa or lower by Moody's rating service and BBB or lower by Standard and Poor's rating service). In return for potentially greater income, high-yield funds present investors with greater credit risk than do higher-rated bond funds.

Income-Bond Funds seek a high level of income by investing in a mixture of corporate and government bonds.

Income-Equity Funds seek a high level of income bv investing primarily in stocks of companies with a consistent history of dividend payments.

Income-Mixed Funds seek a high level of current income by investing in income-producing securities, including both equities and debt instruments.

International Funds seek capital appreciation (a rise in share price) by investing in equity securities of companies located outside the United States. Two-thirds of fund assets must be so invested at all times to qualify for this category.

National Municipal Bond Funds-Long-term invest primarily in bonds issued by states and municipalities to finance schools, highways, hospitals, airports, bridges, water and sewer works, and other public projects. In most cases, income earned on these securities is not taxed by the federal government, and may or may not be taxed by state and local governments. For some taxpayers, a portion of income may be subject to the federal alternative minimum tax.

Precious Metals/Gold Funds seek capital appreciation (a rise in share price) by investing at least two-thirds .of fund assets in securities associated with gold, silver, and other precious metals.

State Municipal Bond Funds-Long-term work just like national municipal bond funds (see above) except that their portfolios primarily contain the issues of one state. For residents of that state, the income from these securities is typically free from both federal and state taxes. For some taxpayers, a portion of income may be subject to the federal alternative minimum tax.

Taxable Money Market Mutual Funds seek the highest income consistent with preserving investment principal. These funds seek to maintain a stable $1.00 share price by investing in short-term money market securities (a portfolio's average maturity must be 90 days or less) of the highest credit quality. Examples of money market securities include U.S. Treasury bills, commercial paper (short-term IOUs) of corporations, and large-denomination certificates of deposit (CDs) of banks. Because of their short-term, high-quality characteristics, money market funds are considered the lower risk mutual funds available.

Tax-exempt Money Market Funds-National seek the highest level of federally tax-free income consistent with preserving investment principal. These funds invest in short-term municipal securities issued by states and municipalities to finance local projects. For some taxpayers, a portion of income may be subject to the federal alternative minimum tax.

Tax-exempt Money Market Funds-State work just like other tax-exempt money market funds (see above) except that their portfolios invest primarily in issues from one state. A resident in that state typically receives income exempt from federal and state taxes. For some taxpayers, a portion of income may be subject to the federal alternative minimum tax.

U.S. Government Income Funds seek income by investing in a variety of U.S. Government securities, including Treasury bonds, federally guaranteed mortgage-backed securities, and other government- backed issues.

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