About Mutual Fund

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates. Mutual funds are one of the best investment option for individuals or corporate investors. Investors get the benefit of a professional management. As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. The returns of a mutual fund are not guaranteed and based on the performance of its constituents. Highly-trained professionals function as fund managers for mutual funds. You can use fund rankings issued by research firms like Morningstar and Standard & Poor to select funds. Mutual funds generally incorporate hundreds of different securities and hence it gives investors the benefit of diversification. The value of a share of mutual fund is called the net asset value per share, or the NAV. The price is determined by taking the net value of all the securities in the fund and dividing by the outstanding shares. Mutual funds can be open-ended or closed-ended. An open-ended mutual fund issues an unlimited number of shares in the open market and redeems them at market value from investors. Closed-end mutual funds function in the opposite manner i.e., they issue a fixed number of shares and redemption is not allowed. Instead, the only way for an investor to “redeem” a share is by selling it to someone else.

Broadly there are four types of mutual funds. They are as follows:
• Equity Mutual funds: Equity mutual funds consist of collections of stocks of companies. Investors can allocate funds to funds based on their goals. For example, growth funds are focused on stocks of companies with significant growth potential in the future. Income funds include stocks of companies that pay regular dividends.
• Money Market mutual funds: Money market mutual funds invest in short-term debt issued by corporates, government, state, and municipalities The aim of this type of mutual fund is to generate income while minimizing risk.
• Bond funds: Bond funds are considered conservative investments and provide fixed income to investors in such funds. Like money market mutual funds, their investment portfolio is restricted to government and corporate debt. They are generally favored for retirement planning.
• Balanced Funds: Balanced funds aim to strike a balance between equity and bond investing. They are long term funds that incorporate a mix of stocks and bonds in a given ratio. For example, they might have 60% stocks and 40% bonds. Rebalancing these funds on a periodic basis adjusts their composition to prevailing economic conditions. Some are rebalanced based on the investor’s goals. For example, they might incorporate a more conservative approach close to retirement.

Tax Implications of Mutual Funds