What is a Mutual Fund?

A mutual fund is a collective investment scheme that pools money from individual and corporate investors and invest it in stocks, securities and other money-market instruments. A mutual fund is professionally managed by a fund manager who trades/invests the pooled money on a daily basis. The value of a share of the mutual fund is called Net Asset Value (NAV) which is calculated on a daily basis basing on the fund's total value divided by the total number of outstanding shares. The net proceeds or losses of a fund is typically distributed to the visitors depending on the type of mutual fund.

A Mutual fun provides many financial and non-financial benefits to the investors. Like shares, all mutual funds provide returns in the form of dividends and capital appreciation and even bonus issues. But by far, the most significant benefit is one of risk reduction or risk diversification.

When one invests in the stock of any one company, one is exposed to several random risks. For example, the company may go bankrupt, it may suffer huge unexpected losses or the management may not be honest or efficient. Investing in a mutual fund protects investors from such random or non-systematic risks.

Investors subscribe to units of a mutual fund just as shareholders subscribe to shares of a company. Each unit of a mutual fund represents a unitholder's proportionate ownership of the fund's portfolio holdings. The investors of a mutual fund are called unti holders.

Mutual funds render a large range of services that are not available to an investor who invests in securities directly. A mutual fund is thus, as much a financial product as a financial service. Of course, the services rendered by a mutual fund are not free. Unit holders have to pay for the recurring transactions, annual fees, entry and/or exit loads and so forth, irrespective of whether the fund generates returns or not.

Advantages of a Mutual Fund

Disadvantages of a Mutual Fund

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Related Topics:

Mutual Fund NAV (Net Asset Value), Commodity Mutual Funds, Mutual Fund India, Selecting the Right Fund