A fund managed by an investment company which lifts up capital from financier and invests in a pool of assets. Just like a listed company the mutual funds also raise money by selling shares of the fund and purchase various investment securities such as stocks, bonds and money market instruments. In return to the investment in fund the investors become equity holders and called shareholders in each of its underlying securities. Depending upon the performance of the fund the price of the share will remain fluctuating on daily basis and shareholders are also free to sell their shares at any time they feel appropriate.
Mutual fund investments showed a tremendous improvement over the last twenty years particularly in advanced countries. Most people now believe that it’s better to invest in mutual funds than simply letting their cash waste in banks. The reason of such a large attraction is also due to its appeal that every common person can understand the theory of mutual funds in the sense that a group of people bring together their savings and invest in a joint venture. Each individual holds the share of his/her ownership and receive the return. The institutionalization of this concept takes the form of mutual fund where some trustees acknowledge their responsibility towards the safety and security of the money and also that of payment of return to those who provided funds.
There are three ways of earning money from mutual funds.
• Dividends on stocks and interest on bonds.
• Capital gains due to increase in the price of the fund securities.
• If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. One can then sell one’s mutual fund shares for a profit.
The shareholders are always given a choice to receive a check for their earnings or to reinvest in the fund to increase the holding and future profits.
Advantages of Mutual Funds
• The fund as a professional manager manages the invested money with a lot of expertise and therefore provides the investors a secured platform to earn profits over the invested funds with out disturbing their busy schedules.
• Mutual funds invest money in diversified portfolio therefore reduce the risk and maximize the profit.
• Because mutual funds buy and sell large amount of securities at one time therefore provides economies of scale through reduction in transaction costs.
• Shares in mutual fund can be converted into cash very easily.
• Buying a mutual fund is quite easy and shares are available in small denominations for lower and middle class investors.