How Mutual Funds Work
Category: Mutual Funds
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How Mutual Funds Work
Over the past decade, mutual funds have been one of the best options for many American investors to meet financial goals. Mutual funds can offer various diversification advantages and professional management. This industry has continued to be one of the best growth stories in the history of the US financial market. The origin of the mutual funds industry can be traced back to the 1920s, and its rise till today is worth tracking. In the United States, the assets of mutual funds rose from 1.065 trillion dollars to an amazing 6.965 trillion dollars during 1999-2000. In 1980, there were 10% American households that owned mutual funds, by 2000 the percentage increased to 49%.
 Meaning of a mutual fund:
Mutual fund companies gather money from investors and invest it into stocks, bonds, assets, securities and many other instruments related to the short-term money market. ‘Portfolio’ is the term assigned to the combined holdings that are owned by the mutual fund. By investing in a mutual fund you become a shareholder of that particular company. Each share you own in a mutual fund company is representative of your proportionate ownership of the fund’s holdings, and the income that will be generated by them. Whenever the mutual fund company earns a profit, you will earn dividends, likewise your shares will decrease in value if the company faces a loss. A professional investment manager purchases and sells the securities for the growth of the funds.
Different kinds of mutual funds:
Fixed income funds: These funds include corporate and government securities, and they offer fixed returns at low risk.
Equity funds: These are funds that are made up of common stock investments. These can earn you a lot of money, but can also be very risky.
Balanced funds: These funds are a combination of stocks and bonds that have less risk. But you cannot earn a lot through these funds.
How mutual funds work:
You can purchase mutual fund shares from the company itself or from a broker, or from secondary market investors, like the New York Stock Exchange. The per share net asset value of the funds, known as NAV, is the price that an individual pays for buying a mutual fund share. It includes the fee of the shareholder that is imposed by the funds at the time of purchase. The best aspect of mutual funds is that these shares are ‘redeemable’. The mutual fund companies, in order to accommodate new investors, create new shares and sell them. Shares are sold continuously till they become large. Investment advisors are entities that are responsible for the management of the investment portfolio of the mutual funds. Since mutual funds are made up of diverse investments, when you invest in them it tends to lower the risk factor. Since someone else is in charge of managing the investments, there is no need for you to keep track of them constantly. But it always helps to keep a periodic check of your money. Since the basic job of a fund manager is to manage the funds full time, the good performance of your funds is assured.
The rate of returns you get in mutual funds is based on the increment or decrement of the value in a specific period. The returns of a fund are an indicator of the track record. However, it is essential to remember that the past performance cannot guarantee the results you will reap in the future.
Mutual funds, like any other business or investment, has risks associated with the returns. Thus, before investing in mutual funds, it is important to keep your financial goals and circumstances in mind.