What are mutual funds?
WHAT IS A MUTUAL FUND?
A mutual fund is a company whose capital is invested by a professional fund manager in investment-grade instruments like stocks, bonds, and so on. If you invest in a mutual fund, you’re buying shares of that company, and your money is included in the pool of capital that is being invested by the fund manager. The price of buying (or selling back) your shares is based on the market value of the investments of the company at that time.
The job of a fund manager is to maximize the value of the fund while taking into account the risks involved. Your investment will go up (or down) in value, depending on how profitable those investments are which the fund manager is making on a day to day basis. Everyday, the value of your capital is computed based on how much money the fund manager made, or how much worth the investments are in the market at the end of the day.
Your investment in a mutual fund does not earn a fixed interest; instead you earn money when you sell back your shares at a price, or value, that is higher than when you bought those shares.
There are risks involved in investing in mutual funds. The value of your funds could temporarily be down from the time you purchased it, depending on capital market situations, and depending on the kind of mutual fund it is. A bond fund (invested in the bond market) does not fluctuate in value as quickly and as dramatically as an equity fund (invested in the stock market). On the other hand, a bond fund does not increase in value as fast as an equity fund.
You may withdraw your investment, or sell back your shares, in a mutual fund anytime you wish or need the funds. You may, however, end up losing money when you sell at a time when the values are declining. In the long run, say, more than two to three years, the value of a mutual fund improves at a rate much higher than if you were investing in specific individual savings or investment instruments yourself.
