A mutual fund pools money from individual investors in order to buy stocks or other types of investments like cash, bonds, and real estate. The mutual fund company hires money managers to invest the money collected from investors. In buying a share of a mutual fund, you will share the profits and losses of the fund’s investment portfolio proportionately with other investors in the same pool.
By purchasing shares in a mutual fund rather than buying individual stocks, you not only let the fund managers invest your money, but also spread out your investment risk (also known as diversification) since you own shares of hundreds of stocks instead of a single stock.
A mutual fund share is calculated based on the fund’s net asset values (NAV). Fund NAVs are calculated at the end of each business day by adding up the total value of the fund’s investments in stocks and the like and dividing it by the number of fund shares outstanding.
What are the different types of Mutual Funds available?
There are four basic types of mutual funds currently available in the market categorized according to the investment objective of the fund or the investments that the fund is primarily invested in.
- Money Market Funds invest purely in short-term (one year or less) debt instruments.
- Bond Funds invest in long-term debt instruments of governments or corporations.
- Balanced Funds invest both in shares of stock and debt instruments.
- Stock Funds / Equity Funds invest primarily in shares of stock.
What is the NAVPS?
NAVPS or the net asset value per share represents the price of one share from a mutual fund. All shares in a mutual fund are bought and sold using the NAVPS, which changes every business day depending on the market performance of the fund.
How do I earn from Mutual Funds?
If the NAVPS of the mutual fund you are invested in increases or appreciates, you can sell your mutual fund shares for a profit. In the same way, if the NAVPS of the mutual fund you are invested in decreases or depreciates, you may realize a loss if you redeem.
Like any other investment instrument, mutual funds are best held long-term especially for mutual funds that have investment objectives of capital growth such as equity funds.
The top mutual fund companies you can check:
- ATR-Kim Eng Securities, Inc.