What Makes Mutual Fund Ticks?

Mutual funds are companies that pool the money of many individuals together and invests it into stocks, bonds, or other securities based on the objective or goal of the fund. For example, if a particular mutual fund company has purchased stock in Microsoft, Coca-Cola, Disney, and other companies, a shareholder in that fund becomes an indirect stockholder in all of those companies.

Mutual funds make money for their investors in different ways . One is when the holdings of a fund itself increase in value and are sold by the fund manager for a profit, known as a capital gain. That income is passed to the investor in the form of “distribution”. Another way to make money is when stocks or bonds held by the fund produce income either as a result of dividends from stocks or interest from bonds. These distribution can either be received as cash or reinvested to purchase more shares of the fund. The third and final way a shareholder can make money with a mutual fund is when the net asset value increases, and the shares are then sold off at that increased price. This produces another capital gain.

Advantages of mutual funds over other investments from Pollack and Heighberger , authors of the book, “The Real Life Investing Guide” (1998) :

* Diversification. One of the major benefits of mutual funds is that they allow new investors, even those starting with just a few dollars, to enjoy the benefits of portfolio diversifications. Diversification means that the investor’s money is divided between many different types of stocks and bonds, allowing the investor to cushion losses from a single investment.

* Professional Management. Mutual funds are managed by a fund manager who looks over the fund’s portfolio, choosing when to execute the trades, how much of a particular stock to own, etc., all of which affects the worth of the fund.

* Ease of Investment. Investors of mutual funds don’t need to deal with daily or weekly investment decisions. Mutual funds offer hassle-free options, like automatic deposit, and cheap start-up costs.

· Cost Controls. Unlike stocks, which require brokers and their commission charges to get started, many funds can be started without such fees.