Mutual Funds

A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. In the United States, a mutual fund is registered with the Securities and Exchange Commission (SEC) and is overseen by a board of directors (if organized as a corporation) or board of trustees (if organized as a trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. The fund manager, also known as the fund sponsor or fund management company, trades (buys and sells) the fund's investments in accordance with the fund's investment objective. A fund manager must be a registered investment advisor. Funds that are managed by the same fund manager and that have the same brand name are known as a "fund family" or "fund complex".
The Investment Company Act of 1940 (the 1940 Act) established three types of registered investment companies or RICs in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds. Recently, exchange-traded funds (ETFs), which are open-end funds or unit investment trusts that trade on an exchange, have gained in popularity. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type.
Hedge funds are not considered a type of mutual fund. While they are another type of commingled investment scheme, they are not governed by the Investment Company Act of 1940 and are not required to register with the Securities and Exchange Commission (though many hedge fund managers now must register as investment advisors).
Specifically, they must diversify their investments, limit ownership of voting securities, distribute most of their income to their investors annually, and earn most of the income by investing in securities and currencies. For example, mutual fund distributions of dividend income are reported as dividend income by the investor. There is an exception: net losses incurred by a mutual fund are not distributed or passed through to fund investors.
Outside of the United States, mutual fund is used as a generic term for various types of collective investment vehicles available to the general public, such as unit trusts, open-ended investment companies (OEICs, pronounced "oyks"), unitized insurance funds, UCITS (Undertakings for Collective Investment in Transferable Securities, pronounced "YOU-sits") and SICAVs (société d'investissement à capital variable, pronounced "SEE-cavs").

Mutual funds may invest in many kinds of securities. The types of securities that a particular fund may invest in are set forth in the fund's prospectus, which describes the fund's investment objective, investment approach and permitted investments. The investment objective describes the type of income that the fund seeks. For example, a "capital appreciation" fund generally looks to earn most of its returns from increases in the prices of the securities it holds, rather than from dividend or interest income. The investment approach describes the criteria that the fund manager uses to select investments for the fund.

Mutual Funds Defined

For some, recommendations will come along the lines of buying real estate that can be flipped or rented out to generate monthly income and long-term capital appreciation. For others, it will mean putting as much money away as possible into a low-paying CD or maybe even mutual funds.
But for as many people who recommend funds, an equal amount will dismiss them for a variety of reasons.

1. Mutual Funds are too risky. Although every fund, from money market funds, income funds all the way to equity funds and specialty funds will involve some element of risk, the fact remains that virtually every fund actually reduces risk. How? Through diversification. What this means is that a mutual fund takes all of your money (and every one else's) and invests in enough securities that anyone with less than $500,000 could never even imagine achieving. And since diversification is key to eliminating risk, saying that mutual funds are too risky is like saying air travel is dangerous. Risk is relative and in terms of reducing that risk, mutual funds achieve it better than any other investment.

2. Funds are expensive. Depending on the amount of money invested, most people cannot find better value for every dollar invested than they can when they invest in mutual funds. While the fund companies generate an expense for their administrative efforts, they almost always come in cheaper than investing individually through a discount broker. With most fees at 1% or less, an investor with just $10,000 to invest could only make 10 trades in 1 year at $10 each to achieve the same cost savings. This tells us that funds are owned by so many different unit holders that the collective pays a reduced fee, not the individual investor.

3. People who invest in Funds lost 50% of their savings when the market crashed. While many people certainly lost much of their portfolio's value thanks to the recent market crash of 2007-2009, funds actually offer enough different flavors of funds that smart, properly diversified investors would have lost much less than nearly any other type of investor. Between high yield investments, money market funds and specialty asset class funds, investors can find properly diversified investments for any and every need they may have. There is an abundance of selection; one does not need to be limited to domestic stock market-linked investments.
As shown here in the three most common arguments against this type of investment, mutual funds are basically highly diversified, risk-spread investments that, while they charge expenses, are cheaper than virtually any other type of investment out there. Best of all, mutual funds can be virtually any asset class, not just equities, providing investors with plenty of options.

An Easy Explanation

MFs are one of the prime investment options of our times. It has several advantages that any other investment hardly offers. However, it is important to get into details of MF and all its aspects before start buying/selling MFs. Understanding whole MF investment procedure would help you to understand each and every aspect of investment in MFs.

What is Mutual Fund?
MF is an investment company in which investors invest their money. That collective money invested by all investors goes to combination of assets like stocks, bonds, and other securities. MFs are categorized depending on where major part of money is invested in. For example, MFs in which huge share of investment goes to stocks are known as stock funds. Capital growth, dividends, and other benefits grow in MFs according to growth of all assets in the fund portfolio.

Who is Mutual Fund manager?
As told in first section, investors do not invest money in securities directly. It is MF that acts as medium between investors and asset allocation. Who is responsible for asset allocation? A fund manager is a responsible person that looks after investment of investors and invest collective amount in stocks, bonds, and other securities that are best according to research, knowledge, and experience of fund manager.

How to buy Mutual Funds?
Mainly, there are two possible ways how investors can buy MFs. First is to buy directly from MF Companies when they make initial public offerings. You can get schedule of public offering of different companies from newspapers, brokers, or websites. To buy MFs, you need to have demat account connected to your back account. If you want to save money on brokerage, fill the form on your own and submit it. Nowadays, most of the MFs companies offer their shares online as well. You can go online and search for official website of that investment company and fill information that is requested to buy MFs.
Another way is to buy closed-end-funds. It means that you are buying shares of MFs directly from stock market. In this case, you need to pay NAV (Net Asset Value) plus shareholder fees applicable at the time of purchase.
Before buying any MF just makes sure that you are choosing best MFs to invest for guaranteed return. Online tool like MF calculator can help you choose best MF of current time.

How to sell Mutual Funds?
Process of selling MFs is much easier than buying funds or taking decision of when to sell MFs. You can directly sell MFs to Investment Company or you can consult broker to help you sell your MFs holdings. Broker would charge you brokerage to process selling procedure. How investors earn money?
One might wonder how investors earn money by investing in MFs. First step is to select best MFs to invest and then MFs will operate in way that investors earn maximum yields. Mainly, there are three parameters which earn returns for investment in funds. First parameter is Dividend on shares which depend on interest on the securities in the portfolio. Gain in capital is another way your funds can earn you money. In short, Mutual Fund investment procedure is easy one and good returns are inevitable if right decision is made.

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