Technically, mutual funds are “open-end” funds -- one of four basic types of an investment company. Closed-end funds, exchange-traded funds and unit investment trusts are the three other types.
In order to understand the structure of mutual funds, it is helpful to compare them to other “40 Act Funds” -- industry jargon for investment companies registered under the Investment Company Act of 1940.
Open-End Funds and the Structure of Mutual Funds
You can think of a mutual fund as having an open-end structure because the cash flow door -- both into and out of the fund -- is always open. In other words, the portfolio manager continues to invest new cash from investors, and the fund company continues to offer new shares of the fund to new investors.
So, when you invest in a mutual fund, money is directed to the mutual fund, shares are created and issued to you (to be held in an account at a brokerage firm, bank or at the fund company). This process is different from investing in a stock. When you invest in a stock, you are buying or selling shares on an exchange or over-the-counter (unless it is an initial public offering or a secondary offering) – new shares are not be created.
