What Is a Mutual Fund And How To Invest In It – The Basics
What Is A Mutual Fund And How Does It Work?
A mutual fund is an investment company that allows a company to pool money from its investors and put it in various securities and financial instruments such as bonds, stocks, short term debt, commodities and stuff like these. All the holdings of any mutual fund are commonly referred to as a portfolio. Investors are allowed to buy shares in mutual funds and then each share the investor buys represents her portion of ownership in the fund and the revenue it generates. Mutual funds offer to ordinary people the opportunity for potential diversification and professional investment management.
Mutual funds are open end companies. This means that they issue new shares each time a new investor wants to invest in the fund and buy back investor’s shares when she wants to withdraw her money. You can only buy share issued by the fund (this may happen with the help if an intermediary), and the fund is obligated to buy back these shares from you anytime you want.
The funds also offer 3 different ways for you to earn money:
* Dividend Payments -Your investment will earn money from interest on bonds or dividends on stock. Then the fund pays all the investors all the income generated less the expenses.
* Capital Gains Distributions -The value of securities sometimes do increase and when a security that has increased in price is sold, the fund usually has a capital gain. When the financial year comes to an end, the fund distributes all the capital gains less any losses.
* Bigger NAV – If the market price of a portfolio rises, after the expenses have been deducted, the entire price of the fund and the shares rises. A higher NAV (net asset value of the fund) reflects a higher value of your initial investment.
So it does not matter whether you are planning for your child’s education, house, marriage or a vacation in the Bahamas, this type of fund is in some cases tax efficient, simple and an effective tool to put your money in for long term goals. Besides that, the funds also offer a wide array of investment options including hybrid schemes, equity schemes, money market schemes, fixed income schemes and ETFs. You can choose depending on your needs.
Types and Classification of Mutual Funds
There are four main types of mutual funds: bond funds, stock funds, target date funds and money market. Each category has different risks, rewards and features.