A mutual fund is one of the financial vehicles made up of a pool of
money collected from many investors to invest in securities like stocks,
bonds, money market instruments, and other assets. Mutual funds are
managed by fund managers, who allocate the fund’s assets to produce
capital profits or earnings for the investors.
Mutual funds provide small or individual investors accessibility to
professionally managed securities. Each shareholder participates
proportionally in the gains or losses of the fund. Mutual funds invest in a
massive number of securities, and performance is usually tracked as the
change in the total market capitalization of the fund, aggregating
performance of the underlying investments.
When you buy a unit or share of a mutual fund, you are buying a part of its
portfolio value
Mutual fund shares do not give its holders voting rights. A share of a mutual
fund represents investments in many different stocks rather than one
holding.
the price of a mutual fund share is known as the net asset value (NAV) per share
A fund’s NAV is calculated by dividing the total value of the securities in
the portfolio by the total amount of shares outstanding.
Mutual fund shares can typically be purchased or redeemed as needed at
the fund’s current NAV, does not move during market hours, settled at the
end of each trading day.
Investors typically earn a return from a mutual fund in 3 ways:
The largest category is that of equity also known as stock funds. As
the name implies, this sort of fund invests only in stocks
A fixed-income mutual fund focuses on investments that gives a set
rate of return, usually are debt instruments. The idea is that the fund
portfolio generates interest income, which it then given to the
shareholders.
Their investment strategy is based on the belief that it is extremely
hard, and very expensive, to try to beat the market consistently. So,
the index fund manager buys stocks that correspond with a major
market index. These funds are cost-sensitive.
The money market consists of safe, risk-free, short-term debt
instruments, mostly government Treasury bills. Pretty safe place to
park your money. You won’t have to worry about losing your
principal and therefore won’t get massive results
Income funds are named for their purpose: to provide current income
on a stable basis. These funds invest only in government and highquality corporate debt, holding these bonds until maturity in order to
provide interest streams. While fund holdings may appreciate in
value but the main aim of these funds is to provide steady cash flow
to investors.
These popular investment vehicles pool investments and employ
strategies consistent with mutual funds, but they are structured as
investment trusts that are traded on stock exchanges and have the
added benefits of the features of stocks, can be bought and sold at
any point throughout the trading day, can also be sold short or
purchased on margin, carry lower fees than the equivalent mutual
fund, also benefit from active options markets, where investors
can hedge or leverage their positions, also enjoy tax advantages
from mutual funds. Compared to mutual funds, ETFs tend to be more
cost effective and more liquid.
• Liquidity
• Diversification
• Minimal investment requirements
• Professional management
• Variety of offerings
• High fees, commissions, and other expenses
• Large cash presence in portfolios
• Difficulty in comparing funds
• Lack of transparency in holding
