If you've ever scratched your head wondering what on earth is Mutual Fund, this post is for you. It is quite normal to a layman to stumbling over questions like- What does Mutual Fund mean? How does a Mutual Fund work? You will be pleasantly surprised to know that Mutual Funds are quite simple to understand. They are not as complicated as other financial products & assets.
According to the experts, Mutual Funds can yield handsome returns in a short period of time if a few numbers of things are kept in mind. But, before you get your hands on any financial assets, product or services, it is important to understand its basics. Only then you should take the first step in the direction to investment. So, let's have a closer look at what Mutual Funds mean, Mutual funds examples & how they work.
What are Mutual Funds?
As the name suggests mutual fund means- the collected money. In a lay man language, when money is collected from two or more than two people that total amount of collection is known as mutual funds. More specifically, a mutual fund is something like an investment portfolio in which many people invest their money and when all funds put together it is called Mutual Funds.
For more clarification let me add one more point, a task of identifying the type of mutual fund is quite simple. If we use the collected money to buy stocks or share then you can call it a stock mutual fund. On the other hand, if you buy bonds, then consider it as a bond mutual fund. However, there are a few more types of mutual funds like Exchange Traded Funds, Money Market Funds, Fixed-Income Funds, and Equity Funds. Hope you got my point with ease of mind.
So, now let's proceed to understand how a mutual fund works as an investment portfolio.
How do Mutual Funds work?
It is quite difficult to understand every aspect, nature & working principle of mutual funds. But, in one straight line you can think of a mutual fund as both an investment asset and a real company. Let's take an example of Stocks. When you buy shares of any company or stock, it means you are buying the partial ownership of that company. But, the story of mutual funds is different.
When you buy a mutual fund from any company, it means you are giving your money to a company which further invests your money in buying the share of other companies. So, it means, you are not the one who buys the stocks of the company, rather you allow the mutual fund company to buy stocks with your money. And in return you expect to get benefits from the company who used your money. However, there are a few more ways to use a pool of money besides buying stocks. Find below how you may get benefits by investing in mutual funds:
Mutual Funds allow the investors to earn from dividends on stocks and interest on bonds. The rate of interest and dividends are mentioned in the portfolio. Also, the investors get an option to buy more shares & bonds rather than financial benefits.
Investors also can sell their mutual funds if they notice an increase in the market value of their mutual funds.
If any capital gain occurs on securities, it leads the investors to gain some benefits through distribution.
What are the types of Mutual Funds?
On the basis of nature & purpose, mutual funds could be divided in many categories. If you have a closer look at the portfolio of any mutual fund then you will have a clear idea about its type and the returns it can provide you. The best part of the mutual fund is that it suits the pocket of almost every type of investor. Small as well as big hotshots can invest their money in it.
Some of the best examples of the mutual funds to invest in are equity funds, fixed-income funds, index funds, balanced funds, money market funds, income funds, Exchange Traded Funds and so on.
That's the end of today's lesson: What is Mutual Fund & How Does it Work. In this helping post, we have discussed some basic aspects of mutual funds. We also briefly described the types and best mutual funds to invest in. We are sure you will find all the information quite helpful. If any doubt is left in your mind, let me know through the comment section. We will try to help you as soon as possible.