A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.
Why do people buy mutual funds?
Mutual funds are a popular interest among investors because they generally offer the so many features given as below:
Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees..
What are the benefits and risks of mutual funds?
If we talk about benefits of mutual fund then Mutual funds offer professional investment management and potential diversification. There are three different ways to earn money:
Dividend Payments
A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income, less expenses.
Capital Gains Distributions
The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.
Increased NAV(Net asset value)
If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.
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