Understanding Of Mutual Funds In The Simplest Words


In a simple mean, a mutual fund is nothing but it is a collection of stocks. Mutual fund work as a company and it brings together a group of people and invest the money in a bonds, stocks or other securities and money market instruments.

Investing in a mutual fund is like buying a small slice of a big pizza. The investor of a mutual fund gets a proportionate share of the fund’s gains, losses, income and expenses.

Mutual fund is operated by the money managers. Money manager invest the funds which produce capital gains and income for the investors. A mutual fund’s portfolio structured to achieve the investor’s objective which is stated in its prospectus.

Understanding Of Mutual Funds In The Simplest Words

There are different types of Mutual Funds:

J Closed-End Mutual Funds: In these types of mutual funds issue a fixed number of shares to the public and trade on the exchanges. Closed end funds frequently invest in a specific industry, sector and in a certain country.

JOpen-End Mutual Funds: Open- end mutual funds are ready to issue to the public on a continuous basis. Shareholders purchase the shares at a net asset value and can trade at the current market price.

JLoad Funds: The term “load” means the sales charge which is paid by investors. The sales charge taken by the mutual fund at the time of purchase, is known as a front-end load and back end load means when the investor sells their fund.

Objectives of Mutual Fund:

There are many different types of mutual funds; all have its own goals.

The main objective is obviously fund objective means what the fund will invest. Another are equity, debt, money market etc.to invest in equity means to invest only in stocks. And if the investor invest their money into debt it means they want to invest only in fixed income securities.

Advantages of Mutual Fund:

Professional management: The manager of mutual fund is professionally trained and experienced and they constantly managing the fund of investor.

Instant Diversification: One of the main objectives of mutual fund is to diversify the portfolios, so it would be an easy and successful way to achieve the objective. And this portfolio combines a different stock, bonds, commodities etc. If the one stock goes down, there is another compensate for it. In short mutual fund decrease the risk of losses.

Liquidity: If you want to get back mutual fund, you must have to instruct your broker or financial advisor. They sell it immediately and the fund comes back into your account within a day. An individual stock would take a long liquidate.

Affordability: This is the most important advantage for investor that is affordability. The minimum initial investment require for a mutual fund is law compare to others.

Convenience: The mutual fund is more convenient because it provides the periodic purchase plans and automatic withdrawal plans and direct investment of dividend and interest.

You can also find mutual fund in which you want to invest, so it could be related both your risk tolerance and horizon of your investment.


Management Fees:

Mutual fund companies have to pay salaries to their managers and marketing expenses are also very high and of course marketing expenses paid before the investors or owners get paid. And sometime it is also possible that higher fees generally relate a lower performance.so management fee is one of the big disadvantages for a mutual fund companies.

Locked in Clause:

There is two different types of mutual fund structure-one is which allows the investor to go in and out at any time and the other one is fixed for a particular time (normally 5 to 7 years), and if you want your money back earlier then you will pay charge for it.

Wasted Cash:

Investors who invest their money in mutual funds want to withdraw their funds occasionally, then there must always available in cash but it is not collecting any interest for you, so it is waste of your money to invest.so it is better that your cash or money sitting in your bank account.

So we can say that the mutual fund is nothing but a tool where the investors invest their money into different investment tools. There is also some advantage and disadvantage too. But it also good to invest because it diversifies the risk level of the investors. And big disadvantage is mutual fund has a big cost i.e. Management fees, marketing, tax etc.

Author Bio:

This article has been written by Guddy Vyas who is an owner at Vyas Infotech. She also writes articles especially for Business, finance, Stock market News, investment and banking. Her blog Vyas Infotech is known as finance and technology blog. Vyas Infotech is an emerging blog for guest authors.