Understanding the Legal Framework of Mutual Funds

A mutual fund's definition determines the extent of investment opportunities it may participate in. As a general rule, mutual funds fall under the Investment Company Act of 1940. This act applies to all investment groups, of which a mutual fund is one type. The act regulates the disclosures a fund must make, how it can borrow and spend money and even who can oversee the fund. Depending on the type of fund, i.e., the fund's definition, these rules will differ.

Open-End vs. Closed-End

One of the primary mutual fund classifications is open versus closed. In an open-end fund, a mutual fund can continually issue additional shares. This means an individual holding the shares can continually buy or sell equity in the fund. The result is a more "open" investment opportunity, giving the investor options to exit the fund or become more heavily involved in the fund based on its performance.

No-Load vs. Load

A no-load fund is offered directly through a financial institution that created it. There is no sales charge in order to buy into the fund. A load fund, by contrast, is branded by a third party that is simply acting as the seller. The seller charges a fee.