Mutual Fund

A mutual fund is a type of financial vehicle that consists of a pool of money that many investors have
collected to invest in securities such as stocks , bonds , money market instruments and other assets.
Mutual funds are run by qualified portfolio managers, who distribute the assets of the fund and seek
to produce capital returns or profits for owners in the fund. The portfolio of a mutual fund is
structured and managed to suit the investment goals set out in its prospectus.
Mutual funds provide access to professionally managed portfolios of equities, bonds , and other
securities for small or individual investors. Consequently, each shareholder shares proportionally in
the fund's gains or losses. Mutual funds invest in a large number of stocks, and performance is
typically measured as the shift in the fund 's overall market cap — derived from the
combined performance of the underlying assets.
Key Takeaways
A mutual fund is a type of investment vehicle that consists of a stock , bond, or other securities
portfolio.
Mutual funds provide access to diversified , professionally managed portfolios for small or single
investors at a low price.
Mutual funds are divided into several kinds of categories, representing the kinds of securities they
invest in, their investment objectives, and the type of returns they seek.
Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can
affect their overall returns.
The vast majority of the money in employer-sponsored pension plans goes into the mutual funds.
Understanding Mutual Funds

Mutual funds pool money from the investing public and purchase other securities, usually stocks and
bonds, using that money. The value of the mutual fund company depends on the performance of the
securities it decides to purchase. So when you buy a unit or share of a mutual fund, you buy the
performance of its portfolio or, more specifically, a portion of the value of the portfolio. Investing in
a portion of a mutual fund is different from investing in stock shares. Unlike stock, shares of mutual
funds do not grant any voting rights on their investors. Instead of just one holding, a share of a
mutual fund represents investments in many different stocks (or other securities). That is why the
price of a share in a mutual fund is called the net asset value (NAV) per share, sometimes expressed
as NAVPS. NAV of a fund is derived by dividing the total value of the portfolio securities by the total
amount of the outstanding shares. Outstanding shares are those held by all shareholders,
institutional investors and executives or insiders of companies. Mutual fund shares can typically be
purchased or redeemed at the current NAV of the fund, which does not fluctuate during market
hours unlike a stock price, but is settled at the end of each trading day.
The average mutual fund holds hundreds of different securities, which means shareholders in the
mutual fund gain significant diversification at a low price. Consider an investor who only buys stock
from Google before the firm has a bad quarter. He is going to lose a lot of value because his dollars
are all tied to one company. Another investor, on the other hand, may buy shares of a mutual fund
that owns some Google stock. When Google has a bad quarter, it loses much less, because Google is
just a small part of the portfolio of the fund.
How Mutual Funds Work

A mutual fund is an investment as well as an actual enterprise. This dual nature may seem odd, but
it's no different from how an AAPL share is an Apple Inc. representation. When an investor
purchases Apple stock he purchases partial ownership of the company and its assets. Similarly, a
mutual fund investor purchases part ownership of the mutual fund firm and its assets. The
difference is that Apple is in the business of making innovative devices and tablets while the business
of making investments is in a mutual fund company.
Investors typically earn a return from a mutual fund in three ways:
Income is earned from stock dividends, and interest on bonds held in the portfolio of the fund. A
fund pays out almost all of the income it receives over the year in the form of a distribution to fund
owners. Funds often give investors the choice to either get a distribution check or reinvest the
earnings and get more shares.
If the fund sells priced securities the fund will have a capital gain. Most funds also pass on those
gains in a distribution to investors.
If fund holdings increase in price but are not sold by the fund manager, the price increases for the
fund's shares. You can then sell your shares in the mutual fund to the market for a profit.
If a mutual fund is interpreted as a virtual company, the fund manager is its CEO, sometimes called
its investment adviser. A board of directors hires the fund manager and is legally obliged to work in
the best interests of mutual fund shareholders. Most fund managers are also Fund owners. A mutual
fund company contains very few other employees. Some analysts may be employed by the
investment advisor or fund manager to help pick investments or perform market research. In order
to calculate the NAV of the fund, a fund accountant is held on staff, the daily value of the portfolio
that determines whether share prices go up or down. Mutual funds need a compliance officer or two
to keep up with government regulations, and probably an attorney.
Most of the mutual funds belong to a much larger investment firm; the largest has hundreds of
separate mutual funds. Some of these fund companies, such as Fidelity Investments, The Vanguard
Group, T. Rowe Price, and Oppenheimer Funds, are names familiar to the general public.
Types of Mutual Funds

Mutual funds are divided into several categories, representing the types of securities they've
targeted for their portfolios and the type of returns they 're seeking. There's a fund for almost every
type of investor or approach to investment. Other common types of mutual funds include money
market funds, sector funds, alternative funds, smart-beta funds, target-date funds and even fund-of-
funds or mutual funds that purchase shares from other mutual funds.
Equity Funds
The biggest category is that of stock or equity funds. As the name suggests, this kind of fund invests
mainly in inventories. There are diverse subcategories within this group. Some equity funds are
named for the size of the companies that they invest in: small , medium or large-cap companies.
Others are named by their approach to investment: aggressive growth, revenue-oriented, value, and
others. Also, equity funds are categorized according to whether they invest in domestic (U.S.) stocks
or foreign equities. There are so many different kinds of equity funds as there are so many different
kinds of equity. A great way to understand the universe of equity funds is by using a style box, one
example below.
The idea here is to classify funds based on both the size of the companies in which they are investing
(their market caps) and the growth prospects of the stocks invested. The term value fund refers to
an investment style that looks for high-quality , low-growth businesses that are out of market
favour. These companies are characterized by low price-to - earnings ratios (P / E), low price-to -
book ratios (P / B) and high yields on dividends. Spectrums, on the other hand, are growth funds,
looking at companies that have (and are expected to have) strong growth in earnings, sales and cash
flows. These firms usually have high P / E ratios and don't pay dividends. A compromise between
strict value and investment in growth is a "blend," which simply refers to companies that are neither
value nor stocks of growth, and are classified as being in the middle somewhere.
Fixed-Income Funds
A further large group is the category of fixed income. A fixed-income mutual fund focuses on
investments, such as government bonds , corporate bonds, or other debt instruments, that pay a set
rate of return. The idea is to generate interest income from the fund portfolio, which it then passes
on to the shareholders.
These funds are often actively managed, sometimes referred to as bond funds, and they seek to buy
relatively undervalued bonds to be sold at a profit. These mutual funds are likely to pay higher
returns than deposit and money market investment certificates, but bond funds aren't risk free.
Because bond types are many, bond funds can vary dramatically depending on where they invest. A
fund specializing in high-yield junk bonds, for example, is much riskier than a fund investing in
government securities. In addition , nearly all bond funds are subject to interest rate risk, meaning
that if the rates go up, the fund 's value will go down.
Index Funds
Another group, which has become extremely popular in the last few years, falls under the "index
funds" moniker. Their investment strategy is based on the belief that trying to beat the market
consistently is very hard, and often expensive. The index fund manager purchases stocks that match
a major market index like the S&P 500 or the Dow Jones Industrial Average (DJIA). This strategy
requires less research from analysts and advisors, so fewer expenses are incurred before they are
passed on to shareholders to eat up returns. These funds are often designed with a view to cost-
sensitive investors.
Balanced Funds
Balanced funds invest in an asset class hybrid, be it stocks , bonds, money market tools or alternative
investments. The goal is to cut the risk of exposure across asset classes. This type of fund is also
called an asset allocation fund. There are two variations of those funds designed to meet the
objectives of the investor.
Some funds are defined with a fixed specific allocation strategy, so that the investor may have a
predictable exposure to different asset classes. Other funds follow a dynamic percentage allocation
strategy to meet various targets for investors. This can include reacting to market conditions,
changes in the business cycle or the changing phases of the investor's own life.
While the goals are similar to those of a balanced fund, dynamic allocation funds do not have to hold
any asset class to a specified percentage. Therefore the portfolio manager is given the freedom to
switch the asset class ratio as necessary to maintain the integrity of the stated strategy of the fund.
Money Market Funds
The money market is made up of safe (risk-free), short-term debt instruments, mostly Treasury bills.
It's a secure place to park your money. You 're not going to get significant returns, but you're not
going to have to worry about losing the principal.

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A mutual fund is a type of financial vehicle that consists of a pool of money that many investors have

Understanding Mutual Funds

How Mutual Funds Work

Investors typically earn a return from a mutual fund in three ways:

Types of Mutual Funds

Money Market Funds

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