Explained Mutual Fund
A mutual fund is a diversified open end investing investment fund that pools money from several investors in order to buy various securities. Mutual funds can be institutional or retail in nature. Mutual funds are usually traded on major exchanges such as NASDAQ and NYSE. Mutual Fund investors can benefit from the transaction costs involved in buying and selling securities, but they do not pay capital gains tax on dividends received. It is important to note that mutual funds are not investments in the underlying securities; rather, they are an agreement between investors for the mutual fund to invest in securities of an agreed upon price and for the investor to receive regular payments called dividends. The purchase and sale of securities are conducted through a fund manager who makes investments on behalf of the fund.
Some of the advantages of Mutual Fund are that they offer a low risk level with significant potential for earning returns. With mutual funds, most of the risk of holding individual stocks and bonds is transferred to the fund manager. Thus, with a mutual fund investors can avoid the volatility of market prices. Moreover, the transactions of these funds do not involve large amounts of money, which minimizes the opportunity for fraudulent activities. Investors in mutual funds can diversify their investments by owning a wide range of securities and can also access a wider array of global investment opportunities.
In order to buy mutual funds one must first select an appropriate investment vehicle, i.e. the type of securities that the fund will be holding and also the category of investments it will invest in. The prospectus provided by the sponsor will describe in detail the various categories of investments to be held by the fund and also the types of investments that are included within those categories. The prospectus should be read carefully and any questions regarding the investment should be answered.
