A mutual fund is a type of investment company that combines money from many people to buy stocks, bonds, and other securities. Professional money managers run mutual funds, allocating their clients' cash to maximize long-term returns for shareholders.
For a mutual fund, the portfolio is set up and managed to achieve the goals outlined in the fund's prospectus. Investing in a mutual fund allows even a single person to have exposure to a diversified group of assets.
Can You Explain How Mutual Funds Are Valued?
The mutual fund's worth is tied to the success of its underlying investments. The performance of a mutual fund's portfolio, or more accurately, a portion of the portfolio's value, is what an investor purchases when purchasing a unit or share of the fund. Buying a mutual fund share is distinct from purchasing a company's stock.
Mutual fund investors are not given a voice in corporate affairs when they buy shares. A mutual fund's shares are investments in various equities or other assets. Net asset value per share is a common shorthand for the price at which mutual fund shares can be purchased. You may calculate a fund's NAV by dividing the total value of its holdings by the number of outstanding shares.
How Do Mutual Fund Returns Get Figured Out?
By purchasing Apple shares, an investor is acquiring a stake in the firm. Similarly, when individuals invest in a mutual fund, they buy a piece of the business and its assets. There are three common ways for investors to receive a return from a mutual fund, generally paid out quarterly or annually:
- The fund generates revenue through dividends and interest on the stocks and bonds it owns and distributes virtually all of its annual revenue to its shareholders. Distributions from mutual funds are typically paid out to shareholders in either cash or the opportunity to buy more fund shares.
- If the fund sells appreciated securities, it generates a financial gain, usually distributed to investors.
- Your investment in a mutual fund can generate a return if and only if the fund's share price rises.
The Various Mutual Fund Varieties
Even while there is a wide variety of mutual funds from which to choose, most of these vehicles may be classified as either stock funds, money market funds, bond funds, or target-date funds.
Stock Funds
This fund's primary holdings are stocks or other forms of equity, as may be expected from the name. There are a wide variety of subsets within this larger category. It is common practice for equity funds to be classified as miniature-, mid-, or large-cap based on the typical size of the firms in which they invest. Investors can choose additional strategies, including aggressive growth, income-focused, value, and others.
Bond Funds
Minimum-return mutual funds fall under the umbrella of fixed income. Government bonds, corporate bonds, and other forms of debt are the primary holdings of a fixed-income mutual fund. Interest earned by the fund's holdings is distributed to investors.
Index Funds
Mutual funds that track a market index, like the S&P 500 or the Dow Jones Industrial Average, are known as index funds (DJIA). Cost-conscious investors typically create these funds since they need less research from analysts and advisers, and the savings are passed on to shareholders.
Balanced Funds
Investments in equities, bonds, money market instruments, and other asset types are all included in the portfolios of balanced funds. This fund is called an asset allocation fund, and it aims to lower overall portfolio risk by spreading investments out among several asset categories.
Money Market Funds
Short-term, government-backed debt instruments (like Treasury bills) make up the money market because they are safe and carry no default risk. The principal is safe, but the returns are low. The average yield is somewhat higher than that of a standard savings or checking account and lower than that of a certificate of deposit.
Mutual Fund Fees
Annual operational expenses and shareholder assessments are typical for a mutual fund. The expense ratio of a mutual fund is the yearly proportion of assets under management allocated to operational costs. A fund's expense ratio is the total of its advisory or management charge plus its operating expenses. The load is a mutual fund's sales load, which is a sales fee or commission.
Mutual Fund: A Real-Life Example
Fidelity Investments' Magellan Fund is a top mutual fund. The fund's inception in 1963 motivated a desire to gain value through exposure to the common stock market. Between 1977 and 1990, while Peter Lynch was in charge of the fund's portfolio, it had its most outstanding performance. During Lynch's time as CEO, Magellan's AUM grew from $18 million to $14 billion.
