What is a mutual fund?
A mutual fund is an investment vehicle that pools money from investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets with a predetermined investment objective. The combined holdings the mutual fund owns are known as a portfolio. The fund manager trades the portfolio's contents, sometimes called its underlying securities, realizes capital gains or losses and collects dividend or interest income.
Fund ownership is denoted in units, and each unit represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate. The price of units fluctuates daily in relation to its net asset value, which is calculated based on the total value of the fund divided by the number of units currently issued and outstanding.
A Mutual Funds can make money for its unit holders in two ways: the mutual fund can pay dividends or the mutual fund value can rise in value. It can also can decrease in value.
Mutual Funds have become a widely popular and effective way for investors to participate in financial markets in an easy, low-cost fashion, while muting risk characteristics by spreading the investment across different types of securities, also known as diversification.
Mutual Funds can play a central role in an individual's investment strategy. They offer the potential for capital growth and income through investment performance, dividends and distributions under the guidance of a portfolio manager who makes investment decisions on behalf of mutual fund unitholders.
In recent years, mutual funds have evolved to include a variety of sectors, investment strategies and structures to accommodate the objectives and risk tolerance of a wide range of investors.