What You Need To Know About Mutual
Funds To Increase Your Investment
Return
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No
other investment vehicle
possesses the attributes of
quality, liquidity and
diversification of a mutual
fund. If you’re looking for an
opportunity to share in a
diversified portfolio, a mutual
fund is currently one of the
most popular options available,
and is well worth the investment
of time to understand its
intricacies. Want to find out
more? This article aims to
define the parameters of a
mutual fund, as well as make
explicit its advantages, the two
different types of mutual fund
you can invest in, and what you
need to know if you’re
considering investing in one of
them.
Designed as a low-cost, common
investment vehicle for
like-minded investors, a mutual
fund allows people to
participate in a diversified
portfolio of securities. This is
done through the purchase of
shares or units in the mutual
fund. The ease in which an
investor can redeem their
investment is one explanation
for the popularity of mutual
funds. Others include the
accessibility and low minimum
investment requirements for some
funds. Irrespective of the
amount invested, all investors
are given the same level of
service and return potential per
dollar invested. A $500 investor
has the same rights and
associated risks as a $100,000
investor. Mutual funds grant
access to professional money
managers and entry to markets
that were previously limited to
the wealthy and privileged few.
With so many types of investor
needs, increasing numbers of
specialty funds have grown into
what is today over 38,000 funds.
The amount invested by a fund,
combined with the
diversification, which can be
anywhere from 1 to 1,000
different securities, or shares,
helps reduce the overall
dependency on just one
investment. This in turn
provides the possibility of
higher return and less risk.
Other advantages of mutual funds
include the convenience and
efficiency of record-keeping. An
investor can receive updates on
his/her accounts, as well as on
the fund itself. The fund’s
board of directors, custodian
and transfer agent are
responsible for ensuring the
integrity of this reporting. The
fee payable to these parties,
along with a management fee, is
used to compensate the fund’s
manager or investment advisers,
is part of the fund’s expenses
and as such reported regularly
and charged directly to the
fund.
Although you hold shares or
units in the mutual fund, you do
not physically own any of the
individual securities in the
portfolio. Rather, you own a
portion or pro rata of the
shares in the mutual fund. So if
your investment made up 10% of
the funds total assets, you
would not own 10% of the
securities in the portfolio but
rather 10% of the shares/units
issued by the mutual fund.
Although there are many
variations of the mutual fund,
two basic types exist: closed
end and open-ended.
A closed end mutual fund has a
set amount of shares for issue;
once these shares are issued the
fund is closed to new
investment. This type of fund is
generally traded on the stock
exchange, as any publicly listed
company would be. Because the
shares of a closed end mutual
fund are sold at the price the
general market dictates and not
at their NAV (or net asset
value), the share price may be
above the NAV, at it or, as is
often the case, below it. The
redemption of shares in this
type of fund is only possible
when there is a buyer for the
shares offered for sale.
An open-ended mutual fund has no
fixed amount of shares, and new
shares are constantly being
offered at the NAV. This type of
fund is purchased directly from
the fund or one of its sales
agents. When an investor sells
their shares, these are redeemed
by the fund – in most cases
within three working days.
Open-ended mutual funds are
redeemed at the NAV, and offer
the convenience and ease of
share redemption.
Now that you’ve defined the
mutual fund, learned its
advantages and basic set-up, you
have all the information you
need to decide what sort of fund
you’re interested in investing
in. Above all, do your research:
we hope to have helped you a
little along your way in that
regard.
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