A mutual fund is a type of investment wherein which a "a group of investors" or an investment company pools money from many investors to buy stocks, bonds, or other money market instruments and is managed by a Fund Manager. This is a better option to investing directly, say in the stock market, especially if one has no time to do the research on individual companies and have no technical expertise in stock trading.
Courtesy of IMG
From the diagram above, we can see that many investors buy shares on a Mutual Fund of their choice and then the Mutual Fund Company will buy
stocks, bonds, other securities, or a combination of one or both. With the pooled money, the Mutual Fund can invest more in good and strong companies ,"blue chip" companies. The good performance of the companies will translate to dividends and earnings which will add value to the Fund. This earnings will then be distributed back to the investors, which is reflected in the value of the fund, NAV (Net Asset Value). This is how you can monitor the value of your investment, that is, if you are gaining or not. Let me explain: when you invest in a mutual fund, your money is translated to number of shares. Say you want to invest P5,000- and the NAV (or simply, price per share) is one peso per share. So, you will have 5000 shares of the mutual fund you chose to invest. The value of the NAV is changing everyday and you can monitor it from the Fund's website or the newspaper. Just multiply the number of shares you have with the NAV and that's the amount of your money at that particular time.
stocks, bonds, other securities, or a combination of one or both. With the pooled money, the Mutual Fund can invest more in good and strong companies ,"blue chip" companies. The good performance of the companies will translate to dividends and earnings which will add value to the Fund. This earnings will then be distributed back to the investors, which is reflected in the value of the fund, NAV (Net Asset Value). This is how you can monitor the value of your investment, that is, if you are gaining or not. Let me explain: when you invest in a mutual fund, your money is translated to number of shares. Say you want to invest P5,000- and the NAV (or simply, price per share) is one peso per share. So, you will have 5000 shares of the mutual fund you chose to invest. The value of the NAV is changing everyday and you can monitor it from the Fund's website or the newspaper. Just multiply the number of shares you have with the NAV and that's the amount of your money at that particular time.
This is the structure of a Mutual Fund which explains for the management fee or entry fee when you first buy your mutual fund. It is managed by fund managers who makes the decision on how to invest the pooled money base on the established goals of the Fund.
Courtesy of IMG
On part 2, I will discuss the different kinds of Mutual Funds.
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