A mutual fund is a type of financial machine made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments and other assets. Mutual fund’s portfolio is structured and maintained to match the investment objectives stated in his prospectus. It gives small or individual investors access to professionally managed portfolios of equities and bonds. Money collected from investing public and used in buying other securities like stocks and bonds are generally classified as MUTUAL FUNDS. A share of a mutual fund represents investments in many different stocks or other securities instead of just one holding.
E.G: Consider an investor who buys only Google stock before the company has a bad quarter, He/She stands to lose a great deal of value because all of his dollars are tied to one portfolio. On the other hand, a different investor may buy shares of a mutual fund that happens to own some Google stocks; when Google has a bad quarter, she loses significantly less because Google is just a small part of the fund’s portfolio.There are few ways investors earn a return from mutual funds:
-If the fund sells securities increases in price, the fund has a capital gain which most funds are also pass on these gains to investors in a distribution.
-Investors can sell the mutual fund shares for a profit in the market when the fund holdings increase in price are not sold by the fund manager because the fund shares increase in price.
-Investors earn from dividends, on stocks and as well interest on bonds held in fund’s portfolio.
In conclusion, mutual funds are divided into several categories representing the kinds of securities they have targeted for their portfolios and the type of return they seek.