Mutual fund is now spreading introduce to investors. Get to know about Mutual fund and why you should not miss this type of investment.
What is Mutual Fund and how does it work?
Mutual Fund is the common name for an open-end investment company.
Mutual funds pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, or other securities depend on the investment objective of fund. Mutual Fund issue redeemable shares that investor’s purchase directly from the fund (or through a broker for the fund) instead of purchasing from investors on a secondary market. Furthermore the investors can sell their shares back to the fund (or to a broker acting for the fund). The investment portfolios of mutual funds typically are managed by professional known as “investment advisers” that they must register with the SEC.
How can the investors earn money from mutual fund?
Investors can earn money from mutual fund investment in three ways:
NAV (Net Asset Value) the value of the funds assets minus its liabilities.
NAV = (Funds Assets – Funds Liabilities)/ number of outstanding shares
SEC rules require funds to calculate the NAV at least once daily. So If the market value of a fund’s portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV reflects the higher value of your investment. When you sell your share back to the fund you can profit from capital gain of share.
2.Capital Gains Distributions. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.
3.Dividend Payments. Like a company, the fund may earn income from dividends and interest on the securities in its portfolio. The fund then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned in the form of dividends to the investors.
This depends on the fund policy that they state in Prospectus of the Fund. Not all fund pay dividend to investors, so you need to read the prospectus clearly.
If the mutual fund has no policy to pay dividend, they use the dividend to reinvest in their portfolio, result to fund growth and increasing of NAV and Capital Gains that the investor can earn from the fund instead of dividend.
Mutual Fund is a good alternative to invest. Why should invest in mutual fund?
Mutual fund is recommended to the new investor with a lack of experience and who does not have a lot of money to invest but want to earn more than interest from saving you can try mutual fund, but remind that investment in mutual fund is higher risk than saving. Some mutual funds accommodate investors who do not have a lot of money to invest by setting relatively low dollar amounts for initial purchases, subsequent monthly purchases, or both.
Mutual fund also spread your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails. Some investors find it easier to achieve diversification through ownership of mutual funds rather than through ownership of individual stocks or bonds with small money.
Moreover the investors who do not have much time to follow market news this may cause highly loss. Mutual fund manages by professional money managers who research, select, and monitor the performance of the securities the fund purchases. So they may use less time to research and make decision than invest directly to stock on bond on their own.