Mutual Funds - The Best Option to Pool in Your Money

  “Be fearful when others are greedy. Be greedy when others are fearful”.

It seems to be very complicated and intimidating, but investing in mutual funds is the simplest way to build big corpus in the future. Investments in mutual funds are mainly based on the trust where money is collected from a large number of investors who share a common objective of investment. After pooling-in the money, the same is invested in different instruments including stocks, securities, bonds, and other money-market instruments. The units are owned by each investor which shows the holdings of the fund. Thus, the income generated from this collective investment will be distributed among the investors after making the deductions of certain expenses and by calculating the particular scheme’s NAV (Net asset value). When a fund investor is buying the part of ownership of the fund, he is actually buying the ownership and assets of the company.

Mutual funds can be defined as “an investment vehicle which is made up of the pooling of money from various investors in stocks, bonds, money market instruments, and other assets”.

Features/Characteristics of a Strong Mutual Fund:

  • Low fees and expenses -  Mutual funds with low expenses doesn’t mean that their performance is low, in fact, it’s seen that the funds with low expenses perform the best. There are some funds which charge substantially higher fees than the average fees justifying the best performance. Sometimes, the additional fee is also charged from the investors in the name of ‘sales fee’, but there is no need to pay off these extra expenses.
  • Consistently good performance - Before investing in any fund, an investor should look at the long-term performance of the company and not on the fact that the company has had a great year. Any fund’s average return on investment (ROI) should be over the period of 10 years and not just one year or three-year performance.
  • Trustworthy - with good reputation - All the best funds are perennially developed under the well-established and trustworthy names in the mutual fund business. Over the past of 20 years, investors are advised to do the business only with the companies on whom they have full faith and confidence.
  • Stickness to a solid strategy - The best performing funds are known to be good performers because they are guided by a good investment strategy and plan. The investors should be very well informed and should be aware of the objective and strategy used by the fund manager for the achievement of the objectives. Any change in the investing strategy and reason behind that change should be clearly explained to the shareholders by the fund manager.

Categorization of Mutual Funds:

Mutual Funds- The Best Option to Pool in Your Money

  1. Open-ended mutual funds: These are the type of funds which do not have restrictions on the amount of shares a fund can issue. It provides a useful and convenient vehicle to the investors.
  2. Close-ended mutual funds: It is a collective investment model based on issuing a fixed number of shares which are not redeemable. As in the open-ended fund, new shares in the close-ended fund are not generated by the managers to meet the demands of the investors. They are usually listed on a recognized stock exchange and are brought and sold from the same exchange. Market decides the price per share and is totally different from the NAV(net asset value).

As now you know the benefits one can accrue with investment in mutual funds, it’s time to initiate your first step towards the same.

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