What is a Mutual Fund?
A mutual fund is made up of several different types of investments, raising money from investors to invest in stocks, bonds, and other securities. When the investments fluctuate so does your revenue from the investment, meaning you receive a share of the pay dividends when the time comes. Mutual funds offer professional management and verification, doing a large sum of your investment work for you. There are more different mutual funds for investors to take advantage of than there are different publicly traded corporations offering common stock.
What are the Benefits of Mutual Funds?
- It’s one of the most popular investment vehicles
- They offer competitive returns
- Your investment risk is diversified over many companies held in a mutual fund portfolio
- Mutual Funds are easy to buy, sell and redeem
- Over 8,000 holding about 9 trillion dollars
Close-ended and open-ended Mutual Funds
Mutual Funds may also be open-ended or close-ended funds, ‘mutual funds’ is used most often to refer to open-ended funds. Open-end funds have new shares constantly available for investors to purchase the, redeeming their shares directly to the fund, and must be bought back.
Close-ended funds, often referred to as exchange-traded funds (ETFs) only provide a fixed number of shares that the funds may redeem only upon termination of their trust. Shareholders in a close-ended fund are provided the option to sell their shares through brokers on a secondary market to interested investors but not back to the fund.
What’s the total return of a Mutual Fund?
Mutual funds pay their shareholders dividends of earnings from stocks, bonds and other securities purchased. Dividends can be cash or you can reinvest into funds. Funds may be automatically reinvested your dividend is given approval. Often dividends will be taxed a favorable long term capital gain rate. Return of capital or tax-free municipal bond dividends will be tax-free. Dividends received in a tax-favored retirement account will be deferred.
An additional source of income for mutual funds is capital gain, when a security fund is sold any fluctuation must be distributed to shareholders. Like dividends, capital gains can be claimed in cash or you can have them reinvest and have the same taxation rules as dividends. Share price increases: the rise in the value of a share of your fund, meaning if your share rises one dollar you made one dollar times however many shares you own. This gain commonly goes by paper profit due to not receiving profit until you sell your shares.
Purchase and Redemption of Mutual Funds
The purchase of a mutual fund is a relatively easy process that can be accomplished by working directly with a mutual fund company or from a securities broker. When purchasing directly you will send money to the fund and redeeming will be the same way. All transactions will be done directly through you the customer and the mutual fund company. Many allowing you to redeem shares over the phone.
The process of purchasing shares through a broker is basically the same process, the difference for working with the broker being their responsibility is to execute all transactions with the mutual fund company. Purchasing through a broker allows you to benefit from easily redeemable shares or automatic investment plans. When selling shares the option for you to sell shares directly back to the fund is an option. Allowing you to redeem shares over the telephone but some require written requests. Investing in mutual funds involves risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus
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