finance article No.24332
What is a Mutual Fund
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A Mutual Fund can be termed as a form of a collective investment that
collects money from many investors and invests the money into stocks, bonds,
short-term money market instruments, and / or other securities.
In this type fund, the fund manager trades the fund's underlying securities,
realizing their capital gains or loss, and collects the dividend or say the interest
income. The investment earnings are then passed along to the individual
The value of a share of the Mutual Fund, known as the net asset value (NAV),
is calculated daily based resting on the total value of the fund divided by the
number of shares purchased by investors.
Usage Of A Mutual Fund
In this type fund can invest in many different kinds of securities. The most well
known are cash, stock, and the bonds, but there are hundreds of sub-
categories. Like the stock funds, for instance, can invest primarily within the
shares of a particular market, technology or utilities.
These are known as the sector funds. A Mutual Fund bond can vary
according to the level of risk like the high yield or the junk bonds, investment
grade corporate bonds, sort of issuers mainly the government agencies,
corporations, or the municipalities.
The maturity of the bonds maybe short or long term. Both stock and bond
funds can invest in primarily the US securities domestic funds, or the
combination of both US and foreign securities that is the global funds, or
primarily foreign securities like the international funds.
Most Funds investment portfolios are frequently adjusted under the
supervision of an expert professional manager, who then forecasts the future
performance of investments apt for the Mutual Fund and chooses the ones,
which he or she believes, will most closely match the Funds stated investment
A Mutual Fund is administered through a parent management company,
which has all the rights to hire or fire fund managers.
These Funds are subject to a special set of regulatory, accounting, and tax
rules. Dissimilar to most other types of business entities, the Mutual Fund is not
taxed on their income as long as they distribute substantially all of it to their
The sort of income they earn is often unchanged as it passes through to the
shareholders. Fund distributions of tax-free municipal bond income are also tax-
free to the shareholder. Taxable distributions can either be of the ordinary
income or capital gains, depending on how the fund has actually earned it.
Types Of Mutual Funds
Mutual Fund can be distributed into the following types.
1) Open-end Fund
2) Exchange-traded funds
3) Equity Funds.
4) Bond Funds.
5) Money market Funds.
6) Hedge Funds.
Mutual Fund vs. Other Investments
Funds offers several advantages over the stock investments, including the
diversification and professional management. A Mutual Fund can hold many
investments in a relatively large number, namely hundreds or thousands of
stocks, thus reducing the risk of any particular stock.
Also, the transaction costs associated with purchasing the individual stocks
are also spread around among all the fund shareholders. A Mutual Fund
benefits from professional fund managers who can apply their professional
expertise and dedicate time to research the investment options.
These Funds, however, are not at all immune to risks. Mutual Fund shares
the same risks associated with the types of investments the fund makes, that is,
mainly invests in stocks. These Funds are typically subject to the same ups and
downs and risks as the stock market.
Selecting A Mutual Fund
Selecting a Fund from among the thousands that are offered is not easy. The
following is just a rough guide, with some common pitfalls.
Always review with your tax advisor before investing in a tax-exempt or tax-
managed fund. Match the term of the investment to the time you expect to keep
it invested. You may always need money until you retire in decades (or for a
newborn's college education) would be in longer-term investments, for instance
stock or bond funds.
Putting money you will need soon in stocks risks having to sell them when the
market is low and missing out on the magnificent rebound.
The charges do matter over the long term, economical is typically better.
While selecting a Mutual Fund you can most defiantly settle on the expense
ratio countenance within the prospectus. Expense ratios are critical in index
funds, which seek to match the markets. Actively managed funds need to pay
the manager, so they usually have a higher expense ratio.
Sector funds often make the "unsurpassed fund" lists you see every single
year. The problem is that it is typically a different sector each year. Also, some
sectors are vulnerable to market-wide events. Avoid making these a large part of
Mutual Fund often makes taxable distributions near the end of the year. If you
or someone you know plan to invest money countenance within the fund in a
taxable account, review the fund company's website to see when they plan to
pay the dividend; or you can prefer to wait until afterwards if it is coming up
Research. Read the prospectus, or as much of it as you can most defiantly
stand. It could tell you what these strangers can do with your money, among
other vital topics. Also, review the return and risk of a fund against its peers with
similar investment objectives, and against the index most closely associated
Be sure to pay attention to performance over both the long-term and the
short-term before deciding on a Mutual Fund.
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