Mutual funds are either closed-end or open-end. A closed-end mutual fund issues only a certain number of shares. After the shares are sold and the money is invested in its portfolio of securities, trading of the fund's shares can take place. The company is not obligated to redeem its shares or issue more shares. An investor who no longer wants to hold shares in the fund may simply sell them in the market. An open-end mutual fund, by contrast, is constantly offering new shares to the public and redeeming its outstanding shares. There is no limit to the number of shares that can be issued. For the most part, open-end fund shares are bought and sold directly through the fund itself or its agents, not over-the- counter or on an exchange.

Mutual funds are either load or no load. Many mutual funds charge a sales fee or commission, which is known as a "load." This fee varies from fund to fund, but is usually in the range of 3% to 8% of the purchase price, with most funds charging about 5%. Other funds do not charge this fee. These are called no-load funds. Both types of funds pay continuing management fees, that differ in amount, to their advisors. Be sure to compare both the load and management fees to determine which will provide a better return over the time you expect to hold the shares. For example, if you plan to hold the shares for a long time, it makes more sense to pay more up-front and less annually; if you plan to hold for a short time, no up-front fee but a greater annual fee makes more sense. There are no significant differences between load and no-load funds in their operation or success, so it pays to choose for performance, net of charges and fees. Some funds also charge an "exit" or sales fee that may cut the return to shareholders. Finally, because 12-B1 plans backload the fees and are based on the average value of the fund, 12-B1 plans may also reduce the return to shareholders.

A balanced mutual fund is a fund composed of both a variety of common stocks (equities) and fixed income securities (debt instruments such as bonds and debentures). The objective of this type of investment is to minimize the risk without sacrificing the possibilities of long-term growth. These funds invest their money, in specified proportions, in fixed income securities and common stocks. For example, the fund may limit its investments to 60% debt and 40% equities. As a result, it does not show as large a gain during a rising market as do most common stocks. On the other hand, it will usually suffer fewer losses in a declining market.

Growth and income funds are for those who want income and whose goal is not immediate capital gain. These funds specialize in high- yielding stocks and bonds. These types of investment plans have two objectives: to achieve long-term growth of capital and to provide investors with a reasonable level of current income. Income funds usually emphasize common stocks, favoring those that pay dividends. Pure growth funds, by contrast, invest in growth-type stocks that pay little or no dividend, but concentrate on long-term capital growth. In declining markets, growth and income funds may show a somewhat higher degree of price stability than funds oriented toward capital gains. However, they may also advance at a slower rate in a rising market.

A dual purpose mutual fund invests equal dollar amounts in each of two types of shares, income and capital. Income shareholders receive a set, minimum rate of return and are paid all of the dividend and interest income (less expenses) produced by the fund. Income shares are redeemable at a stated time and price. Income shareholders do not receive any part of the fund's capital growth. Capital shareholders, on the other hand, receive no periodic income, but are entitled to all the company's assets after the company terminates and the income shareholders have been reimbursed.

Bond funds invest only in debt instruments, usually either corporate bonds or government bonds. Due to the relatively stable returns of these investments as a portfolio base, these funds are generally exposed to less risk than others. Since risk is commensurate with the potential for gain, these investments are not likely to provide exceptional income or gain. While these funds are very conservative, they are subject to at least three potential risks:
The market value of debt instruments fluctuates, so that the value of your shares will fluctuate. Your income may be relatively stable and the underlying obligations may be guaranteed, but that will not help you if you need to liquidate your shares quickly in an emergency and the market is down.

The bonds could be called, removing a source of income from the fund. You may also receive back a portion of your principal when bonds are called, so it is important to have a reinvestment system in place if you invest in a bond fund.

The quality of the underlying bonds may not be very high, and the value of the bonds may decline or the bonds may actually default. Be sure to check the restrictions on the quality of the bonds in which the manager may invest. A diversified portfolio lessens the risk.

Option funds are high-risk investments in which the manager of the fund buys and sells securities options and engages in "short" sales (sales of securities one does not own). Although options may be used in connection with existing portfolios of common stock to limit the effect of upward or downward price movement, the use of options without owning the underlying security is speculative and should not be entered into lightly. Because of the effect of leverage, the potential for return is great, but so is the risk.

Specific portfolio funds invest in the securities in a particular industry, for example an oil and gas income fund, which holds a portfolio of interests in oil and gas wells, or a gold fund, which holds a portfolio of gold mining company stock. There are also funds that invest in only low-grade bonds, high-yield money market instruments or bank certificates of deposit.

Mutual funds may offer taxable or tax-free income. Recent changes in tax laws have narrowed the options for the average investor to shelter investment income from taxes. However, if your objective is tax free income, you can still do so with mutual funds that invest in municipal bonds or tax-exempt notes. These mutual funds may be exempt from federal income taxes, but they may be subject to state and local taxes. There are some mutual funds that produce income that is exempt from income taxes in certain states. Tax- exempt funds are typically identified as "municipal bond" funds or "tax-free" funds.