Mutual Funds
Introduction
As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. In fact, to many people, investing means buying mutual funds. After all, it’s common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account.
Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can make money from a mutual fund in three ways:
- Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
- If the fund sells securities that have increased in price, the fund has a capital Gain. Most funds also pass on these gains to investors in a distribution.
- If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit
Advantages of Mutual Fund
- Professional Management – A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
- Diversification – By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out.
- Economies of Scale – Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.
- Liquidity – Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
- Simplicity – Buying a mutual fund is easy! Most companies have their own line of mutual funds, and the minimum investment is small.
Creating wealth through mutual funds
What is wealth creation? In the simplest sense – a desire to be rich, a desire to have control over the aspects that affect our financial life, a desire to command respect with the control, our money path and having more than sufficient funds to cater all are needs in future. Through mutual funds, we can create wealth and also forgo the market risk factor by a technique called averaging which can be achieved through Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP).