Mutual Funds

Mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund’s current net asset value (NAV) per share, which is sometimes expressed as NAVPS.

Mutual fund pools the capital of many individual investors and invests it in a set portfolio. For example –  If a person,  X decides that he would like to start investing in a balanced portfolio broken down into let say 50% in stocks, 30% in bonds and 20% in cash. However he has only $50 to begin with investing, that means he has only $25 for stocks and even less for bonds. X’s lack of cash limits his ability to invest in a balanced way by himself but he can invest in a mutual fund. A mutual fund allows X to pool his money with other investors who also want to invest in a balanced portfolio, by purchasing unit in the fund X can get the exposure he wants. Utilizing the strength in numbers, mutual funds allow individual investors to allocate their investment in diversified ways, which otherwise isn’t possible.

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