| There might be considerable confusion about the | | | | usually distributed amongst the investors. |
| exact definition of mutual funds especially to | | | | If the fund holdings increase in price, but the |
| laymen who do not understand technical jargon. | | | | manager does not sell them off, the value of the |
| But, there is no need for confusion. The simple | | | | fund's shares increase. You can then sell your |
| definition of mutual funds is as follows: it is a | | | | owned shares to make a profit. |
| professionally managed kind of collective | | | | The fund will also provide you the option of |
| investment plan that pools funds from various | | | | receiving a check for the distribution or reinvest |
| investors, investing it in bonds, stocks or other | | | | your money/earnings to buy more shares. |
| assets. The combined holdings of the bonds, | | | | Advantages of mutual funds: |
| stocks and other assets are termed as portfolio. | | | | * Professional management: - a mutual fund is a |
| Each investor holds shares, which forms a portion | | | | great way to let a professional handle your |
| of the holdings. | | | | money if you do not have the time or expertise |
| Mutual funds may invest in various kinds of | | | | to devote to your stocks. A mutual fund is the |
| securities: cash instruments, stocks, or bonds. | | | | least expensive way for a small investor to hire a |
| There are various sub-categories as well. Stock | | | | full-time manager to take care of your money |
| funds can be invested principally in the shares of a | | | | and make investment decisions. |
| specific industry, such as technology or utilities. | | | | * Diversification: - with mutual funds, you get the |
| These are known as sector funds. A professional | | | | chance to spread out your money over a huge |
| manager always supervises mutual funds | | | | range of fields and sectors, which is impossible for |
| portfolios and monitors, as well as forecasts, the | | | | a small investor on one's own. The risk therefore |
| cash flow in and out of the fund by the investors | | | | is spread out. The more stocks you own in |
| and checks the future performance of the | | | | different areas, the lesser the chance of loss. |
| investments. He or she also chooses those | | | | * Economies of scale: -Transaction costs are |
| investments that will follow closely the mutual | | | | much lower as a mutual fund buys and sells large |
| funds investment objectives. | | | | amounts of securities at a time. |
| There are three ways to make money out of | | | | * Liquidity: -Like individual stock, mutual funds |
| mutual funds: | | | | stock can be transformed into cash at any time. |
| You can earn from dividends on stock or interest | | | | * Simplicity: -investing in a mutual fund is easy |
| on bonds. The fund pays most of the income it | | | | when you understand the definition of mutual |
| gets through the year to fund holders as | | | | bonds. Banks usually have their own line of mutual |
| distributions. | | | | funds and the minimum investment required is |
| If the fund sells a security that has become more | | | | small. Even as little as $100 dollars might be |
| valuable, it makes a capital gain. This profit is | | | | invested on a monthly basis. |