Overview
A mutual fund is a pool of money that is
professionally managed for the benefit of all shareholders. If you
invest in a mutual fund, you own a portion of the fund you participate
in, so any rise and fall pertaining to the fund will affect the value of
that fund. This allows you to work with multiple fields like stocks,
bonds, cash, or a combination of more than one type.
The mutual fund was introduced in Belgium in the early 1800s. It
became popular in the U.S. after the 1920s and has since seen an upward
swing. They were quite attractive during the period right after WWI and
then again in the 1980s and 1990s.
How It Works
You can earn income from mutual funds by the following three methods:
- Dividend payments - Dividend payments and interest are ways in which
your fund earns an income. After deducting the disclosed expenses and
dividends earned by them, the balance amount is distributed amongst the
shareholders.
- Capital gains distributions - When the market value of a security
increases, the firm makes an income on its sale and makes a capital gain
on that transaction. This capital gain, after deducting any losses, is
distributed amongst the investors.
- Increased NAV (net asset value) - If the market value of a portfolio
increases even after deduction of expenses and liabilities, then the
NAV of the fund also increases along with the share. The higher value of
the investment you made in the mutual fund is reflected in the higher
NAV.
Benefits
The main benefit of mutual funds is that they decrease the risk and
increase the probability of higher returns. In addition to this, mutual
funds also offer professional investment management, diversification,
and high-quality investing. Transactions involving mutual funds are very
convenient, flexible, and time saving.
Cost/Pricing
You can easily evaluate and determine the price of a mutual fund
using NAV (Net Asset Value). The NAV is calculated by subtracting
liabilities from the total value of the assets in the fund. Based on
this number, you will be able to determine the price of a unit in your
fund for making transactions. You can even buy and sell mutual funds
based on the current NAV. Since there are many different stocks making
up a mutual fund, their prices are likely to vary on a daily basis.
Consequently, the NAV also changes daily.
Timing
Long-term investors in a mutual fund are affected adversely because
they are subject to higher fees owing to the costs of short-term trading
within the mutual fund. Tight trading penalties are imposed by the
brokerages in an attempt to limit this. A minimum holding time ranging
from 90 days to a year is essential, otherwise a redemption fee may be
charged that is payable during the sale of the shares of a mutual fund.
Companies/Industries
Some mutual fund companies have excellent records of accomplishment
based on their management and profitability for almost over a decade.
These mutual funds are also called "no-load" funds because there are no
commissions or charges for the transactions made in your account.
Similar to a monthly life insurance or mortgage payment, you are allowed
to open an account with as little as $1,000 or you can even agree to
make monthly contributions of $50 or $100 in your account.
