What are Mutual Funds

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What are Mutual Funds

Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. This article helps you to know in depth on:

Is it possible to diversify investment if invested in mutual funds?
Find more on the working of mutual fund
Know more about the legal aspects in relation to the mutual funds
At the beginning of this millennium, mutual funds out numbered all the listed securities in New York Stock Exchange. Mutual funds have an upper hand in terms of diversity and liquidity at lower cost in comparison to bonds and stocks. The popularity of mutual funds may be relatively new but not their origin which dates back to 18th century. Holland saw the origination of mutual funds in 1774 as investment trusts before spreading to Anglo-Saxon countries in its current form by 1868.

We will discuss now as to what are mutual funds before going on to seeing the advantages of mutual funds. Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders.
A Brief of How Mutual Funds Work
Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares.

Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).
Are Mutual Funds Risk Free and What are the Advantages?
One must not forget the fundamentals of investment that no investment is insulated from risk. Then it becomes interesting to answer why mutual funds are so popular. To begin with, we can say mutual funds are relatively risk free in the way they invest and manage the funds. The investment from the pool is well diversified across securities and shares from various sectors. The fundamental understanding behind this is not all corporations and sectors fail to perform at a time. And in the event of a security of a corporation or a whole sector doing badly then the possible losses from that would be balanced by the returns from other shares.

This logic has seen the mutual funds to be perceived as risk free investments in the market. Yes, this is not entirely untrue if one takes a look at performances of various mutual funds. This relative freedom from risk is in addition to a couple of advantages mutual funds carry with them. So, if you are a retail investor and planning an investment in securities, you will certainly want to consider the advantages of investing in mutual funds.

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Frank Gollier
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[Xanthia Alysha]

Thanks for the information. This is really very helpful for every person and for me also.

[michael9]

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[WokSz]

Thank you so much for this. My Dad invests in mutual funds but the way he explained it was not so clear. This really helped.

Quick question: Could you maybe elaborate on the second method for Mutual funds to gain their revenue? I'm not quite sure I totally understood it.

[WokSz]

Thank you so much for this. My Dad invests in mutual funds but the way he explained it was not so clear. This really helped.

Quick question: Could you maybe elaborate on the second method for Mutual funds to gain their revenue? I'm not quite sure I totally understood it.

[akhi kashyup]

but there are few takers for mutual funds in india...

About two months after their launch, activity on mutual fund (MF) platforms of stock exchanges
remains comatose, as investors continue to
stick to the age-old system of buying and selling products through distributors.

One reason for this is over half of the asset management companies (AMCs) are yet to list their products on stock exchanges. But more significantly, most stock brokers are less enthusiastic about providing services to transact mutual fund schemes through the new platform.

[healthnwealth]

A mutual fund is a skillfully managed type of collective investment scheme that pools money from many investors and invests naturally in investment securities
like bonds,stocks,short-term money market instruments, other mutual funds, other securities.There are many types of mutual funds. Stock Picks