What is a Mutual Fund and How It Works?

Investing in Mutual Funds - What is Mutual fund?

What is a Mutual Fund and How It Works?
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As promised, Mutual fund will be one of the investment opportunities I want to discuss to you. It has already been defined generally from the pooled funds but let me elaborate more on its specifics.

WHAT IS A MUTUAL FUND?
Take the definition again of pooled funds and that is where you can get an idea what really is a mutual fund. It is actually a legal investment vehicle that collects funds from the public so they will diversify it in different investment areas such as equities, bonds and money markets as required by law. As what was stated from the pooled funds, an investor entrusts his/her money to a fund expert who will professionally manage them. Your fund manager will of course charge you for the service but in a small fee.

HOW IT WORKS?
Mutual funds have employees who are credible, experienced and experts in stock market investing. They are called “Fund Managers” (as the term you may have read above). They’re the ones doing the investing for you.

In addition, your investment will be exchanged to a Subscription Confirmation so you will know the number of shares you have bought but depending on the Net Asset Value Per Share (NAVPS).

Both Mutual Fund and Unit Investment Trust Funds offer the same investment areas where you want to park your money. If you’re looking for the class asset that gives the highest ROI, go for equity funds. If you want just an average return, choose bonds. If you opt for not so high returns but good for withdrawing it in a short-term basis, go for money-market funds. These are the things you have the right to choose on but not on the picking of stocks. It’s already within the scope of the fund manager’s responsibility. If you chose bonds in a mutual fund, the same way that the fund manager decides where and when to invest your money in bonds. 

IS THIS INVESTMENT RIGHT FOR YOU?
I’d have to guess that the main reason why you may find it interesting to invest in mutual funds is because your daily schedule is so hectic that you don’t have the time to trade in the stock market. This is the best answer I can give if you want to ask whether it’s the right investment for you or not. Add to that reason is when you do not know much about investing but want it simplified. Although you are not the one managing your own investments, still your money goes to the same markets.

Also Read

Personal Finance: Planning, Budgeting, Investments, Savings and Retirement


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There is nothing mutual in Mutual Funds but here investors can make investments in basket of sequity and debts shares of valuable usually listed companies. Mutual Funds are convenient and less risky than investing in shares which require deep knowledge of share market. In India there are 15-16 large fund houses which offer variety of Mutual Funds - large caps, mid-cap, small cap, diversified, multicap, Balance Fund, ELSS,Debt Funds, Fund of Funds etc. Usually small caps give good reurns but are risky.

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