Page 98 - Ready Set Retire

Stephen J. Kelley

can issue; as more investors buy into the fund, more shares are
issued.

In an open-ended mutual fund, the value of the shares is not
affected by the number of shares outstanding, rather it is
determined by the portfolio value, known as “Net Asset
Value,” or NAV. This is done by a daily valuation process
known as “marking to market,” which is done at the end of
each trading day. Since NAV is marked at the end of each day,
any funds traded are settled at day’s end, making quick moves
difficult.

Closed-ended funds issue only a specific number of shares and
do not issue new shares as investor demand grows. Purchases
of shares are often made at a premium or discount to NAV,
providing an opportunity for arbitrage. Closed end funds are
bought and sold on exchanges, just like stocks. Prices are not
determined by the net asset value (NAV) of the fund as with
open-ended funds, but are driven by investor demand
throughout each trading day. In addition, they are managed,
which can increase costs.

Mutual funds generally start with cash, and fund managers
figure out what to buy. Typically, they must stay fully invested,
and minimum purchases can range into the tens of thousands
of dollars.

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