Mutual Funds: Concept
No matter what type of investor you are, there is bound to be a mutual fund that fits your objective of investment.
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns units, which represent a portion of the holdings of the fund.
You can make money from a mutual fund in three ways:
- Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund unit holders in the form of a dividend distribution.
- If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors through a dividend distribution.
- If fund holdings increase in price but are not sold by the fund manager, the fund's unit`s increase in price [ NAV ]. You can then sell your mutual fund units for a profit.
Funds will also usually give you a choice either to receive a check for Dividend Distributions or to reinvest the earnings and get more units.
All mutual funds are variations of these basic three asset classes, of lately Commodities & Gold funds form a part of the basket & realty funds are expected in the near future,
- Equity Fund [ Stocks ]
- Fixed Income Fund [ Government or Corporate Debt ]
- Money Market Fund [ Treasury Bills & Certificates of Deposits ]
It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss or profit. Although some funds are less risky than others, all funds have some level of risk,
it's never possible to diversify away all risk. This is a fact for all investments. Each fund has a predetermined investment objective that tailors the fund's assets,regions of investments and investment strategies. Selling a Mutual fund is as easy as purchasing one. All mutual fund houses will redeem (buy back) your units on any business day, as per predefined market timings.