A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money collected from the investors are then invested by the fund manager in different types of securities. These could range from shares to debentures2 upon the scheme’s stated objective.
Mutual fund is one of the most cost efficient financial products. By investing in mutual funds, one can gain the service of professional fund managers, who would otherwise be costly for an individual investor. Without investing a large amount of money, one can enjoy the service of trading through mutual fund.
Since many investors are investing in one scheme, the market risk (if any) will be divided among the investors. Therefore, the risk is comparatively lower than other investment plans. The trading of units in a mutual fund is done through the stock market. And the price of a commodity is not stable all the time. The market value of the commodity fluctuates, and thus the market risk also fluctuates with respect to the price of the traded commodity.
How is money made through a mutual fund?
- Capital Appreciation: As the value of securities in the fund increase, the fund’s unit price will also increase. There would be a capital appreciation when you sell your available units at a price higher than the price at which you bought.
- Coupon / Dividend Income: Fund will earn interest/coupon from the bonds it holds on.
To know about the categories and advantages of mutual funds, click here3.