Concept of Mutual Funds

A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal ; investment may be in shares , debt securities , money market securities or a combination of these . Those securities are professionally managed on behalf of a the unit-holders , and each investor holds a pro-rata share of the portfolio that is entitled to any profit when the securities are sold , but subject to any loss in value as well .
The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them . Thus a mutual fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified , professionally managed basket of securities at a relatively low cost .
A simplified market definition of a mutual fund is that it is just a collection of stocks or bonds . One can look at a mutual fund as a company that brings together a group of people interested in investing and pools their money in stocks , bonds and other securities . Mutual fund is a stock that gives small investors an access to a well diversified portfolio of equities , bonds and other securities . Each investing shareholder participates in the gain or the loss of the fund . Mutual funds portfolio’s are organized to meet the investing objective stated in prospectus . the net asset value of a mutual fund is calculated daily .
Parties interested in investing in some mutual funds can do so by contacting the fund companies directly . Other funds are sold in the market through brokers , banks , financial planners or insurance agents . Mutual funds were commonly sold by third party participants at a price of sales fee , also known as a load . Today , however , more and more funds can be purchased through no-transaction fee programs that offers funds of many companies . Sometimes referred to as a “ fund supermarket “ , this service lets you consolidate your holdings and record keeping , and it still allows you to buy funds without sales charges from many different companies . Some of big names in mutual funds include companies like Schwab’s One Source , or Fidelity’s Fund Network .
There are several key factors that make investing in the mutual fund market attractive to investors . For those individuals , who do not have time or experience of investing in the stock market , mutual fund offers professional management of their money . Furthermore , by owing shares in a mutual fund instead of owing individual stocks or bonds , your risk is spread out and our investment is less volatile . The concept is that by diversification , an investor’s loss in one stock is offset by gains in others . It would be very expensive for an individual to build his own portfolio of this kind . Just as with an individual stock , mutual funds are liquid and can be turned into cash anytime .
Mutual Fund is an instrument of investing money . Nowadays bank rates have fallen down and are generally below the inflation rate . Therefore , keeping large amounts of money in bank is not a wise option , as in real terms the value of money decreases over a period of time .
One of the options is to invest in the stock market . But a common investor is not informed and competent enough to understand the intricacies of stock market . This is where mutual funds come to the rescue .
A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds . Mutual funds are highly cost efficient and very easy to invest in . 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 of mutual funds is the diversification .
Diversification means spreading out money across many different types of investments . When one investment is down another might be up . Diversification of investment holdings reduces the risk tremendously . On the basis of their structure and objective , mutual funds can be classified in to following major types :
1. Equity Mutual funds : They are also known as stock mutual funds . Equity mutual funds invest pooled amounts of money in the stocks of public companies . Stock represent part ownership , or equity , in companies , and the aim of stock ownership is to see the value of the companies increase over time . Stock are often categorized by their market capitalization , and can be classified into three basic sizes : small , medium and large . Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large –cap , mid-cap or small-cap funds .
2. Growth Funds : These are those mutual funds that aim to achieve capital appreciation by investing in growth stocks . They focus on those companies that are experiencing significant earnings or revenue growth , rather than companies that pay out dividends .
Growth funds tend to look for the fastest growing companies in the market . Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation . In general , growth funds are more volatile than other types of funds , rising more than other funds in the bull markets and falling more in the bear markets . Only aggressive investors , or those with enough time to make up for short term market losses , should buy these funds .