Mutual Fund

A mutual fund (MF) is an investment vehicle that brings together investors’ funds; a tool with which you can invest in various assets: real estate, stocks, bonds, currencies, or other securities.

A mutual fund can be compared to a safe in which all of this is stored. It issues shares representing proportional ownership in the fund’s portfolio, which can be sold directly to investors using the website, or issues them on the stock exchange.

By purchasing a share, the investor becomes the owner of all the assets of the fund in proportion to the number of shares held.

How Does Mutual Fund Work?

Mutual fund consists of two parts:

• A fund in which the funds of all shareholders are accumulated.
• A management company that manages clients’ funds and forms an investment portfolio.

The share price (Net Asset Value, or NAV) is the ratio of the total net asset value of a mutual investment fund to the number of shares in the fund. The fund does not have the status of a legal entity, but the company that manages it has this status, and it is with it that the shareholder enters into an asset trust management agreement.

Each shareholder receives a profit proportional to the share of his contribution to the total capital of the mutual investment fund.

Advantages and Disadvantages of Mutual Fund

The obvious advantages include:

• Low cost per share.
• Minimal risks.
• You can earn more income than a bank deposit.
• The management company protects the interests of depositors.

Accordingly, there are disadvantages:

• There are no guarantees that the shareholder will receive income.
• The management company charges a commission for its services, but there is no guarantee that the investment will bring income.
• In some mutual funds, there are restrictions on the withdrawal of a shareholder’s funds ahead of time.

Types of Mutual Funds by Type of Organization

So, there are the following types of funds:

• Open-end mutual investment fund — its shares are sold and bought on any business day, taking into account the current value of the assets of the management company.
• Interval mutual investment fund — all transactions are performed at the time intervals determined by the investment company.
• Closed-end mutual fund — shares can be purchased only at the time of the formation of the fund, directly from the owner of the shares or when additional units are issued.
• Exchange-traded fund — its shares are bought on the stock exchange through a broker. Shares of such MF are formed in accordance with any index, for example, NYSE, NASDAQ, and they are sold on exchanges. Their liquidity will be higher than that of a regular MF.

How to Make Money on Mutual Fund

You can earn money by buying a share and selling it when its value increases. How to sell a share? By redeeming the share or reselling it to another investor. You can earn money on MF if you buy a share and sell it when its price rises. There are two ways to sell — to redeem or resell to other investors.

What You Need to Remember When Working With Mutual Fund

Remember the following rules:

1. Investing in MF is risky.
2. The management company is responsible for managing the fund, but the investment risk is borne by the investor.
3. The shareholder cannot withdraw his property from the fund — only sell or redeem the share.
4. You can dispose of shares that are not limited in turnover.
5. If the investor has a small amount of money, then one can invest in an open MF and invest in securities anywhere in the world.
6. The investor should periodically check how the management company is doing.
7. The profit from MF is taxable.