Mutual funds, unlike stocks, set a price once each trading day, at 4 p.m. Eastern time. So, if you buy a fund after 4 p.m., you buy at the next day's price; if you place an order before 4 p.m., you buy at that day's price.

Late Trading: Placing an order for a favored investor after 4 p.m. for that day's price is illegal since it enables only those preferred investors to profit from inside and/or late-breaking information when fund managers know what the closing price is at the end of the market day. Another practice under scrutiny is when mutual fund officials permit late trading in order to charge higher fees or gain some other benefit. Such corruption makes it all the more difficult for authorities to catch this illegal practice.

Market timing (short-term trading): Helping favored investors make quick in-and-out trades to exploit market fluctuations is a strategy -- not strictly illegal, though certainly risky -- where investors attempt to buy low and sell high by buying when the market is turning bearish and selling at the end of a bull market.

In many ways, this practice is similar to day trading in stocks to make a quick profit. But, with mutual funds, some investors, or fund managers, often have better information than the average investor and can get in and out of these funds on "advantageous terms." But any gains made for favored investors come at the expense of all other investors. Mutual fund firms generally discourage market timing since it adds costs and dilutes overall return on an investment.

Stale-pricing: Most mutual funds are (technically) closed to new purchases after 4 p.m. Eastern time. However, other international stock markets may still be open. So, a market fund manager can buy stock at yesterday's price knowing that the next day, when the fund incorporates that new information, the manager can sell at a higher price.

"The fund manager then collected interest on the loan as a management fee. In return, the insiders got the loans, a computer terminal to trade directly with the fund, even an updated list of companies in the fund to take better advantage of the stale prices, at the expense of the fund's other shareholders," summarized NewsHour correspondent Paul Solman on Nov. 3, 2003.

This practice, also known as "time zone arbitrage," isn't illegal; still, it effectively swipes money from long-term investors since it benefits only insider, or preferred, shareholders, and not every fund investor.

.-- By Elizabeth Harper, Online NewsHour