What is Mutual Funds and | How Do They Help You?

What is Mutual Funds?

Mutual funds are diversified in nature which means that they are composed of a lot of diverse investments. Many people ask – What is Mutual Fund, the answer is -A mutual fund is essentially a company that pools money of investors to make various types of investments, identified as the portfolio. The examples of the types of investments covered are bonds, stocks, and money market funds. All these investments collectively make up a mutual fund. Many people are troubled with “all of your eggs in one basket” problem, and mutual funds help to resolve the problem.

You neither need to get worried about branching out individual investments yourself or doing your own record keeping because somebody else manages them. The aspect lets it simple to simply purchase them and then forget about them. The fund manager’s compensation is depended on how excellently the fund performs. Hence, it is clear that you can be guaranteed they will work meticulously to assure that the fund performs well.

Best mutual funds could be open-ended or close-ended as well. However, several people consider every mutual fund to be open-ended, and they put closed-ended funds in a different category. The meaning of open-ended is that the shares are issued into the fund or traded back to the fund whenever anybody needs them. In closed-ended funds, it is clear that only a fixed number of shares could be issued for a specific fund. Moreover, they can be sold back to the fund only when the fund terminates on its own. It is possible that you are allowed to sell closed-ended funds to different investors on the secondary market.

Discussing the loads in mutual funds, it refers to the sales charges included in a mutual fund while you buy it. It is known that the load charge is received by the fund salesperson in form of a commission as well as payment on account of their research services. It is possible that load charges can have a maximum value of 8.5 percent of the selling price; also they can be outlined in as a front-end load. This implies that you need to pay it whenever you purchase the mutual fund.

There are several mutual funds which are basically no-load funds. This means that there is no sales fee levied. Furthermore, the fund is direct-marketed hence you can easily purchase it without any assistance from a salesperson. As the present era is of the internet, it is simple to make intelligent choices on your own to save money.

Apart from no-load funds, it is found that there are funds that levy a maximum charge of 3.5 percent in form of a sales fee. They are known as low-load funds and they can serve as a good deal.

Mutual funds are commonly categorized into three categories:

  1. Equity funds:

These funds are composed of investments of common stock only. They can be comparatively riskier but can even let you earn more money.

  1. Fixed-income funds:

The fixed-income funds are composed of government and corporate securities that supply a fixed return and they come with low risk.

  • Balanced funds:

The balance funds combine bonds and stocks in the investment pool and they come with medium to low risk. The low risk may seem good, but it comes with low rates of return. This means that you risk less and your investment would earn less. Before making an investment, you need to decide how much risk you are intended to withstand.

After knowing the description and categories of mutual funds, it is almost clear What is Mutual Fund.

 

How Mutual Funds Help You?

Now you have acquainted yourself on What is Mutual Fund so now let’s have a look at different ways in which mutual funds assist you:

Small capital outlay-

Investors need a huge capital outlay to make up an expanded portfolio of stocks. The mutual funds function based on the pooling of money. Hence, the corresponding investors may have the beneficial ownership of an expanded portfolio of stocks that comes with a very small capital outlay. Moreover, investors are allowed to purchase units of a diversified equity fund by making a minimum investment of Rs 5000.

The range of modes of investments-

Mutual funds present investors flexibility in terms of withdrawal and modes of investment. The mutual fund investors can choose various investment modes such as lump sum (or one time), systematic transfer plans (from other mutual fund schemes), systematic investment plans, systematic withdrawal plans, switches from one scheme to a different one etc.

If you want to seek the benefit of compounded returns over an extended investment period then you may invest in mutual funds’growth option. Furthermore, you can also invest in dividend option when you wish to get constant income from your investment. It is found that no other investment product presents such extensive range of investment modes.

Disciplined investing-

Disciplined investing is one of the appealing benefits of mutual funds one need to know after he/she gets familiar with What is Mutual Funds. Share prices are extremely volatile and they can provoke the investor to sell or buy in short time periods because of fear or temptation. It is possible that repeated trading frequently makes the investor face losses. On the other hand, mutual funds provoke investors to make the investment over a long period.

In addition to that, systematic investment plans provoke investors to capitalize in a disciplined manner to accomplish their long-term financial goals. There are lots of investors who fail to make up a substantial investment amount. The reason behind this is they are incapable to make an investment in a disciplined way.

Systematic investment plans (SIPs) done in mutual funds assist investors to sustain a disciplined approach to investment and savings. By making the investment through SIPs in an automatic way, investors can remain disciplined, and this is vital to accomplishing their financial goals.

It is important to carry out your research and choose a mutual fund that suits the level of risk you wish to take with your cash. Later, you can simply sit back and expect for the best.

Author Bio:

Nidhi Mahajan is a Business and Finance Content writer and she loves to write daily news on Business and Finance.For more info you can check her Business and finance blog at pop-pins.com.