A mutual fund is one of the available financial vehicles that can be used by investors. It consists of a pool of money that comes from a group of investors. The money collected will be used to purchase various securities, like bonds, stocks, money market instruments, and other assets.
Who Participate and Manage the Fund?
Professional money managers are usually the ones that operate mutual funds. These people, later allocate the fund’s assets in such a way to gain great capital return for the investors.
The structure of the mutual fund’s portfolio is created based on the investment objectives, they have stated before in its prospectus. In this fund, each of the investors can participate proportionally in both gains and losses of the fund.
To know the performance, the investors track the change in the total market cap of the fund.
How does It Work?
Before investors decide to put their capital in this fund, they need to know the value of the mutual fund company that they choose. That value comes from the performance of the securities it buys.
In other words, if an investor purchases shares of a mutual fund, they buy the performance of its part of portfolio value.
Different from stock, these funds do not offer voting rights to its shareholders. Commonly, a single share of mutual funds represents an investment in many stocks of companies, not only one.
People call the price of the share from the mutual fund as a net asset value (NAV) per share. Commonly, the mutual fund holds hundreds of securities. Consequently, investors can get a significant diversification at a low price.
There are three main ways that investors can earn money from the funds.
Dividend income
Investors can earn money from the dividend payment from stocks and interest from bonds that are held in the fund’s portfolio. The fund naturally pays out almost all of the income it gets.
Usually, investors can choose to either receive a check for distributions or reinvest it to own more shares.
Sell the Securities
The fund usually also sells securities once there is increasing value of that securities. Commonly, funds give this gain to investors through this distribution.
Increasing Price of Fund Shares
There is a probability that the fund holding price is increasing but the fund manager does not sell it. If that happens, then the funds’ shares’ price also increases. Investors can sell their shares to gain profit from the market.
Writer: Lisa Ramadhani
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