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A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. In fact, to many people, investing means buying mutual funds. After all, it’s common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account.
Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can make money from a mutual fund in three ways:
- Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
- If the fund sells securities that have increased in price, the fund has a Capital Gain. Most funds also pass on these gains to investors in the form of distribution.
- If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit.
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Advantages of Mutual Fund
Professional Management
A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
Diversification
By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out.
Economies of Scale
Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.
Liquidity
Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
Simplicity
Buying a mutual fund is easy! Most Companies have their own line of mutual funds, and the minimum investment is small.
Types of Mutual Fund
Open Ended
Close Ended
Classification of Funds
| Debt Mutual Fund | Hybrid Mutual Fund | Equity Mutual Fund |
|---|---|---|
| Liquid Fund | Equity Orient Balanced fund | Diversified Growth Fund |
| Gilt Fund | Debt Orient Balance Fund | Sectoral Fund |
| Floating Rate Fund | Children Plan | Tax Saving Fund |
| Short Term Bond Fund | ||
| Income Fund | ||
| Monthly Income Fund |