Mutual funds come in many varieties, but here are some basics to keep in mind to help you find your way. While most people have definitely heard the term mutual fund, many people do not understand how they work and how to use them.

With over 10,000 mutual funds available in the marketplace today, the average person may have a hard time selecting appropriate mutual funds for his or her portfolio, determining a good asset mix, and understanding all of the charges associated with buying, owning, and selling mutual funds.

Mutual funds will always have a stated intention, such as investing for growth in emerging markets or small cap value. Investors can buy mutual funds that offer diversification and exposure to various market sectors, asset classes, and strategies.

The mutual fund managers (or a computer algorithm) will trade individual securities in an effort to achieve the goal of the fund and to serve the interests of the fund’s shareholders. There are always some expenses built into a mutual fund, and they always have to be disclosed in the prospectus of the fund.

Some mutual funds have far fewer expenses than others, particularly when they follow an index in a passive way and do not require active management. There are also sales charges that may be assessed at purchase (a front-end load, as it’s called) or upon sale within a certain number of years (a contingent deferred sales charge), and so on, and this is part of how mutual funds are filed into classes.

Many mutual funds are also no-load. Each fund can sell different classes of shares for itself, such as the “XYZ fund” A Shares, B Shares, C Shares, Investor Class Shares, R2 class shares, and so on. The buy-in amount may be different for different funds and different fund classes. There may be discounts of the sales charges if the investor purchases large amounts of the fund’s shares, and these are called breakpoints.

Exposure to mutual funds can also be found in institutional investments such as the kinds of share classes found within 401(k) plans and other qualified arrangements, as well as the “separate accounts” within variable annuities and variable universal life products, even though separate accounts are not technically direct share ownership of the mutual fund.

Separate accounts basically buy up large blocks of an institutional-level class of a fund, and then slice it into their own shares called accumulation units or something similar, according to the provisions of their contract with the client.

How are Mutual Funds Classified?
What are the Expenses Associated with Buying and Owning Mutual Funds?