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Mutual fund definition

Mutual fund meaning

Through mutual funds, small and individual investors have the opportunity to invest in a portfolio comprised of stocks, bonds, and money market instruments, as well as other instruments and commodities. Mutual funds usually provide professional portfolio management and utilize the economy of scale. Mutual funds can negotiate better investment terms and brokers’ fees because they have hefty sums for investing. Moreover, diversification is also achieved when investing in mutual funds because their portfolio consists of different financial instruments.

When money is invested in a mutual fund, the investor is buying shares in the mutual fund. The price at which the fund’s shares are sold or bought is calculated based on the fund’s net asset value plus fees charged by the fund. Investors in mutual funds can have a high level of liquidity because they can easily buy and sell fund’s shares.

3 ways to earn money with a mutual fund

When investing in mutual funds, there are three basic ways an investor can earn money:

  • Dividends. The dividend income minus any fees charged by the fund is paid to the fund’s shareholders.
  • Capital gains. Income generated through buying and selling of assets. When the fund sells an instrument for a price higher than the purchase price, a capital gain will be recorded. The realized capital gains are further paid to the shareholders.
  • Net asset value. Increase in net asset value (NAV) means that the value of the shares owned in the fund has increased. The value of the mutual fund increases when the market value of its portfolio has increased.

Types of mutual funds

Mutual funds can invest in a variety of financial instruments. Therefore, there are different types of mutual funds, such as money market funds, stocks funds, bonds funds, and balanced or hybrid funds. Each of these types can have subcategories depending on the instruments held in the portfolio. With such a wide variety of mutual funds available, investors have the opportunity to invest money in an appropriate fund, in accordance with their preferences.

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