WHAT IS A MUTUAL FUND?

Category: Finance

A mutual fund is a type of investment opportunity that pools assets from stakeholders for investing in securities like bonds, shares and other assets. These mutual funds provide investors the opportunity to access diversified and professionally managed portfolios. A portfolio is a combined holding of a mutual fund. There are commissions or annual fees involved in mutual funds. Every mutual fund has a fund manager or investment advisor who takes the best decision needed for a mutual fund to provide returns and work in the best interest of mutual fund shareholders. Mutual funds are priced in the manner that an investor is buying the performance or profit of the portfolio’s value. The price of a mutual fund share is called Net Asset Value (NAV). It is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding. Outstanding shares refer to those shares held by all shareholders, institutional investors, and company officers. How to investors earn returns from mutual funds? There are three ways, an investor earns returns from mutual funds on quarterly or annual basis- 1. With an increase in fund’s shares prices, we can sell the mutual funds shares in the market, thus earning profits. 2. When securities increase in prices, are sold in the market the fund incurs capital gains. 3. The fund receives profits from dividends as well as interests on bonds. The income is distributed among the owners in the form of distributions. The different types of mutual funds are – 1. Stock funds – these funds mainly invest on stocks and equities. Equity funds are categorized into the size of the companies they invest in are small, mid, or large cap. Others are named by their investment approaches like aggressive growth, income-oriented and value. Equity funds are also categorized by whether they invest in domestic stocks or foreign equities. 2. Bond funds – these type of mutual funds generate minimum return in parts of fixed income categories. These are actively managed and undervalued bonds are preferred. It is also subject to interest rate risks. 3. Index funds – these funds invest upon stocks that correspond with major market indexes like Dow Jones Industrial Average (DJIA). These are cost sensitive in nature. 4. Balanced funds – it is an asset allocation fund that reduces risk of exposure across asset classes. It has a fixed allocation strategy in order to meet investor objectives. 5. Money market funds – these mutual funds are risk-free and short-term debt instruments, where there is less than an average certificate of deposit. 6. Global funds – a foreign fund invests in assets located outside an investor's home country that depends upon the country’s economic condition and political risk factors. 7. Speciality funds – also called as sector funds, these are aimed at different sectors of the economy that requires focus. Ethical funds invest in companies that meet their criteria and values. Regional funds focus on specific geographical area that needs focus. Mutual funds are liquid investments that can be bought and sold anytime. These also provide economies of scale by letting go of numerous commission charges needed in order to create a diversified portfolio. Investor also has the freedom to choose and growth investing. Mutual funds are also ensure accountability and fairness for every individual investor. Smart Policy is an investment company committed towards helping individuals fulfil financial goals by advising well informed investment decisions. Investing in mutual funds is a reliable and risk free path towards wealth accumulation, retiring in comfort and funding of education. We are dedicated towards our investors’ well-being and maintain utmost transparency with regulatory oversight. Smart Policy is the partner of choice for investors on the path towards financial independency, well-being and unlocking potential for a prosperous future.