|
A mutual fund is also known as an open-end fund and is an investment company that spreads its money across a diversified portfolio of securities- including stocks, bonds or money market instruments.
Shareholders who invest in a fund each own a representative portion of those investments, less any expenses charged by the fund.
Advantages of Investing in Mutual Funds
1. Professional Management
2. Liquidity
3. Explicit investment goals
4. Simple reinvestment programs
5. Investment diversification.
Disadvantages of Investing in Mutual Funds
1. Mutual funds cannot be bought or sold during regular trading hours, but instead are priced just once per day.
2. Many funds charge hefty fees, leading to lower overall returns.
3. Overtime, statistics reveal that most actively managed funds tend to under perform their benchmark averages.
Mutual fund investors make money either by receiving dividends and interest from their investment, or by the rise n value of the securities. Dividends interest and profits from the sale of any securities (capital gains) are passed on to the shareholders in the form of distributions. And shareholders generally are allowed to sell (redeem) their shares at any time for the closing market price of the fund on that day.
Reasons to Invest in Mutual Funds:
There are various reasons for the investors to choose mutual funds over other investments such as bonds and stocks.
Diversity can both increase and decrease your potential returns and decrease your overall risk. Mutual funds allow an investor to spread out his or her money across a few as a handful to as many as several thousand companies at one time.
Funds can be beneficial for small investors who would be forced to pay enormous transaction fees if they bought the securities individually and for people who don't have time to research their own investments or who don't trust their own investment expertise.
Mutual funds are not necessarily low cost investments. Many of them charge one time "load fees" to new purchasers.
Types of Mutual Funds:
1. Closed End Mutual Funds:
These funds issue a fixed number of shares to the investing public and usually trade on the major exchanges just like corporate stocks.
2. Open End Mutual Funds:
These funds stand ready to issue and redeem shares on a continuous basis. Shareholders buy the shares at the net asset value and can redeem them at the current market price.
3. Load Funds:
Load funds refer to sales charge paid by an investor who purchases shares in a mutual fund. When sales charge is imposed at the time of purchase, it is known as a front-end load. Back end loads represent charges that are assessed when the investor sells the fund.
4. No Load Funds:
A No Load Fund is sold without a sales charge.
|
