Posted in Finance, Accounting and Economics Terms, Total Reads: 548
Definition: Mutual Funds
Mutual Fund is collection of money from a number of investors that is used to then invest in securities (shares, stock, bonds etc). These investors invest money in the mutual funds and own the share of these funds. They do not own the individual shares or securities bought through these mutual funds. The investors in mutual funds have to share the profit and loss on equal basis.
As these individual investors do not invest on their own in the securities, professionals manage these mutual funds. These are called investment companies which are registered with local authorities. e.g. SEC in US
Each mutual fund has investment objective decided by the investment company which then forms the basis of fund portfolio i.e. which shares to invest in.
Types of Mutual Funds
1) Open Ended Funds : This is the most common and popular type of Mutual Fund. In this type there is no restriction on the number of shares issued/sold. The investors can sell back their shares to the fund in this case. The price is determined by NAV(Net Asset Value). The buy back can happen on a daily basis.
2) Close Ended Funds : As opposed to Open Ended, in the case of Closed ended funds the shares are issued just once. The funds have no clause to buyback shares. In this case the shares can be sold to different set of investors at a price more or less than the NAV.
3) Unit (UIT) : These are issued only once and portfolio do not change once created. They are similar to Open Ended.
The mutual funds also come with their set of expenses which covers the cost to run them.
Few expenses include fees and charges for managing.