What are mutual funds?

January 22, 2020
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Craig Fischer
Posted in Finance
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When looking for best investment choices, you are sure to stumble upon the words mutual funds. However, you may not have a great understanding of the implications of what they are. Many potential investors refrain from investment in mutual funds due to their lack of understanding of it. If you are a person looking for smart investment choices, then mutual fund investors must become an integral part of your investment portfolio. Let us understand the meaning of mutual funds.

What is a mutual fund?

Mutual funds allow the investors to pool all of their money and invest them in stocks and bonds and other assets. It can be an investment dedicated to all of these types of funding or can also be simple stock or bond investment.

With such an investment an individual can benefit from a professional portfolio manager who does the investment on behalf of the investor. The capital can be invested in different securities like equities and bonds among others.

How Do Mutual Funds work?

Now that you know what mutual funds are, let us explain how they generate wealth. When you buy mutual funds of a company, you not only end up buying a share of the company but also a share of their investment. Investors can expect to earn their profit through dividends, capital gain and as a share of the company. The dividends are distributed by the company as and when the investment makes a profit. The time of the dividend might be fixed. After making a profit from selling the fund, the company will pay you up with capital gains, which is always a good amount.

Things to note about mutual funds

Mutual funds can be any type of securities like bonds, stocks or equities.
They are the best investment scope for individuals who want access to a well-managed and diversified portfolio.
There are various fees and taxes involved with mutual fund investment and profit. However, the basic requirement of opening a Demat account comes for free. You can open your account by logging into trusted securities company like Kotak Securities.
Most organization who provide retirement schemes invest in mutual funds.

If the fund manager is not selling and you find a good price, you can sell your share and make a profit.

What are the different types of a mutual fund?

Mutual funds investment is of various types. The best thing is there is a plan to cater to all different types of investors. A common practice of making mutual fund investment is to invest in a set target. It encourages savings and investors to get inspired to fulfil their goals. The main types of mutual fund investment are the following;

Equity fund – It is the type of investment that comprises mainly of stocks. The categorization of equity funds is done by company size, it is also indicative of their strengths and limitations.
Fixed income – These funds offer the most stable and fixed income. Their money is mainly dependent on interest earned.
Index funds – If you want to track the performance of your fund, then index funds will be a perfect match for you. This fund can be easily understood as they are benchmarked against certain standards.
Balanced funds – This is the best option for the investor who wants to stay safe and has a low-risk appetite. Balanced funds are a blend of different types of funds, it gives you the best exposure and considerably good and stable return.
Money-market funds – It is a debt investment for short-term. Your money stays secure and though you will not get very high returns, you will easily know and get an expected return value. They are very low risk, almost risk-free.
International funds – It is an investment made outside of the investor’s home country. While global funds can be invested anywhere, even in the home country of the investor. If well-planned they can provide well-distributed funds which can result in higher profit-making.

There are also other sub-types of funds, but the above are the main types of investment comprising of mutual funds.

There are very few risk-free investments. Higher chance of gain means greater risk. But taking calculated risks, keeping your risk appetite in mind will help you get the highest rewards.