Mutual funds are becoming increasingly popular with investors. The past few years have seen mutual funds taking off as one of the most common forms of long-term investment vehicles. In fact, more than two-thirds of American households have at least some money parked in one or more mutual funds.
This mini-course is going to equip you with the necessary knowledge to make financially sound decisions when it comes to mutual fund investing. We will walk you through the entire process a new investor needs to understand from researching potential funds to following through with the purchase. So stay tuned!
Now, what is a mutual fund you might ask? How do they work and how is it any different from investing in the regular stock market?
In a nutshell, mutual funds allow the average person to invest in a big slice of the market. This market will consists of many stocks, or other instruments that the mutual fund manager has chosen for their fund. Investing in mutual funds will not give you the roller coaster emotion ride from day trading or swing trading but it is certainly a smart place to park your money rather than placing it in a low interest savings account.
What is a mutual fund? Let’s go a little deeper. A mutual fund is basically a group of managing investors that pool money together from many investors to make purchase of stocks, bonds, notes, and other kinds of financial assets that the managers select. For example, ABC Mutual Fund wants to make purchase in shares of company X, Y and Z. ABD then seeks out investments from 100 investors who each buy a share of ABC Mutual Fund for $30 per share. This totals up to $3000 of cash flow, ABC Mutual Fund then takes this $3000 to purchase shares of X, Y and Z respectively. How much volume of each asset in this portfolio would be determined by the fund managers. If the shares of X, Y and Z rises over time, the value of the mutual fund increases respectively.
There are actually quite a few ways to make money from a mutual fund and we will go through them here:
1. Cashing Out – The first way is probably the most intuitive and straightforward one. As the value of the mutual fund, or NAV, net asset value rises its share price rises as well. You may then sell your shares for a profit just as you would with a stock
2. Dividend – Mutual funds, just like certain stocks, offer dividends. The fund does not keep dividends it receives from the stocks it invests in, and instead, it distributes this money to shareholders of the mutual fund.
3. Capital Gain – In the event that the fund manager chooses to sell a particular stock in the portfolio due to whatever reasons, they may choose to distribute this amount of money back to the shareholders. However, there is also a large number of such managers who will instead choose to re-invest the money back into the market for compounding growth.