A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. After all, it's common knowledge that investing in mutual funds is better than simply letting your cash waste away in a savings account.
Definition:
A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). If you would like to know the history of mutual funds, By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification. You can make money from a mutual fund in three ways:
» Income earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a 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 in a distribution.
» If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit.
Advantages of Mutual Fund:
» Professional Management
A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
» Diversification
By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out.
» Economies of Scale
Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.
» Liquidity
Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
» Simplicity
Buying a mutual fund is easy! Most Companies have their own line of mutual funds, and the minimum investment is small.
Creating wealth through mutual funds:
Through mutual funds we can create wealth and also forgo the market risk factor by a technique called averaging which can be achieved through Systematic Investment plan (SIP) and Systematic Transfer Plan (STP).