The actual definition of mutual funds is not something everyone gets, especially laymen who do not technically understand it. But, you should not get confused. Mutual funds meaning is a professionally achieved kind of collective investment that pools funds from various investors, investing in stocks, bonds or other assets. The joint holding of the stocks, bonds and other assets are named as portfolio. Each investor holds these shares, which form a portion of the holding.
Mutual funds may invest in numerous kinds of securities like stocks, cash instruments or bonds. There are various sub groups also to this. Stock funds can be invested primarily in the shares of a precise industry, such as utilities or technology. These are known as sector funds. A professional manager is responsible to supervise the portfolios and monitors, forecasts, cash flow in and out of mutual funds. This way investors can check the future performance of the investments.
You can make money out of mutual funds in the following ways:
- You can earn money from interest on bonds or dividends on stock. The fund pays most of its income as distribution to fund holders all through the year.
- If the fund trades a security that has become more valuable, it attains a capital gain. This profit is then distributed among the investors.
- If there is increase in price of the fund holdings, but it is not sold off by the manager, there is an increase in the value of fund’s share. Then to make profit, you can sell your own shares.
- The fund also gives you an option of reinvesting your money or receiving a check for the distribution/income to buy more shares.
- With mutual funds you can spread your money over a huge range, therefor rate of return is higher, risk is more spread out and lesser are the chances of losses.
