What is a mutual fund?
Mutual funds offer investors the opportunity to group their
money together and buy stocks, bonds and other investments "mutually” to
invest in a common objective, such as generate current income or seek long-term
growth. As a mutual fund investor, you don’t directly own the stock in the
companies the fund purchases but share equally in the profits or losses of the
fund’s total holdings – another reason they’re called “mutual funds.”
Other Key Characteristics:
·
They’re run by professional
money managers who decide which securities to buy (stocks, bonds, etc.) and
when to sell them, with the goal of giving you the best return on your
investment.
·
They typically have low
minimum investments and are traded only once per day at the closing net asset
value.
·
You get exposure to all the
investments in the fund, and any income or losses they generate.
·
They offer a wide variety of investment strategies and styles.
Types of Mutual Fund
There are two types of Mutual Funds:
·
Open-Ended
Mutual Fund
·
Closed-Ended
Mutual Fund
What is an Open-Ended Mutual Fund?
An open-ended mutual fund refers to a mutual
fund that issues directly to investors and redeems them, based on the fund’s
net asset value (NAV), which is computed daily. Open-ended mutual fund has no
fixed maturity date and is perpetual in nature. They are highly liquid in
nature as investors can conveniently purchase and sell units at NAV. Open Ended mutual funds offer SIP (Systematic Investement Plan)
What is a Close-Ended Mutual Fund?
Close-ended mutual funds are funds that have
a fixed maturity period, generally between 3-15 years. The share units of these
mutual funds can be subscribed initially during the New Fund Offer (NFO) and
then can be bought and sold in stock exchange like company shares, subject to
demand and supply of the shares.
Why invest in mutual funds?
They are popular for many reasons, including:
Diversification
Mutual
funds give you an efficient way to diversity your portfolio without having to
select individual stocks or bonds and they cover most major asset classes
(groupings of similar investments such as stocks, bonds, and real estate) and
sectors (specific segments of the economy such as consumer staples, energy,
health care, etc.)
Professional
management
Fund
managers have extensive knowledge that helps them make investment decisions. A
manager may adjust the portfolio mix based on changes in market conditions or a
company's performance to help the fund achieve its stated objective.
Convenience
You
can buy or sell your fund shares on any business day, automatically reinvest
the dividends and capital gains distributions and exchange funds within a fund
family without fees.
Transparency
Mutual
funds are subject to industry regulation to ensure accountability and fairness.
And you can see the underlying investments (stocks, bonds, cash, etc.) in each
fund’s portfolio – either online or via the fund’s prospectus.
