An Introduction To Mutual Funds

By Investor / Published on Friday, 17 Feb 2017 09:38 AM

Mutual Fund as the name describe is the pool of combined fund or money that is collected by a number of investors and individuals for the purpose of investing in stocks, bonds and in other financial instruments.

A mutual fund is just like a company where shareholders combine their money to start a business activity. In mutual funds, investors combine their hands and collect the money for investing purposes. They are real owners of the fund just like shareholders. The investors of mutual funds hold the shares of mutual funds and not directly own the shares of those companies on which the fund has invested.

Mutual funds are traded on the secondary market. A fund can be bought or sell either directly from the company managing the fund or from the brokers market. Mutual fund unit or share valued on the basis of the net asset value of the fund. The price of fund unit or share is determined by adding all the securities value owned by the fund and dividing it by the number of shares that are issued.

The mutual fund is very best suitable for those individuals or investors whose don’t have time to directly involve in the buying and selling of the securities or don’t have enough investing skills in the trading of stocks, bonds, and financial assets. The other main advantage of mutual funds is that a small investor can have access to a diversified portfolio of investment that minimizes the risk of loss. The mutual fund investment treats equitably to all investors. Profit or loss are shared proportionally by the investors according to their size of investment in the fund.

Mutual funds are managed by the professionally trained fund’s managers who are specialized in the field of securities investment and have experienced in stock and money market. They create a diversified and balanced portfolio of investment in order to generate profits and capital gains for the investors and meeting the already stated objective of the mutual fund.

Types of mutual funds

Mutual funds have the following two categories based on their structure;

Open ended fund are those funds that are bought and sold at any time. The investor can buy and sell the unit of the fund on the net asset value of the fund at their own will. That means the new investor is welcome because it doesn’t restrict the issuance of shares and the existing investor can exit by selling their shares.

A close ended fund has a fixed number of shares and operates or issued for a fixed duration. That fund open for subscription during a specified period. So after that period, new shares are not issued. Close ended funds are traded in the stock exchange and in over the counter market (OTC). The redemption of the units takes place for the term specified.

Funds can be further categorized by their investment objective, most common categorized are detailed below;

Growth Funds – invest in stocks for potential growth through higher returns

Growth and Income Funds– Invest in stocks and bonds with the intention of earn dividend income with good prospects of future growth.

Equity Income Funds– objective to earn dividend income through stocks and bonds

Balanced fund– Invest in stocks, bonds and cash equivalents with long-term growth objective with capital gain and dividend/interest income.