A mutual fund is a collection of stocks and/or bonds. A mutual fund (like a company) brings together investors and make them invest their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.
How can an
investor can gain income from mutual funds ?
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1)dividends on stocks and interest on bonds..
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2) If the M Fcompany sells securities that
have increased in price, distributes its profits to investors
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3) If company does not sell the stocks or
bonds or securities , investor can sell their own shares in the market
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MF companies will also give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.
Advantages of Mutual Funds
• Experience Management - Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.
• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.
• Liquidity - Allows you to request that your shares be converted into cash at any time.
• Simplicity - Buying a mutual fund is very simple and the minimum investment is small. Most companies also have automatic purchase plans whereby as little amount can be invested on a monthly basis.
Disadvantages of Mutual Funds
• Professional Management - Management is by no means infallible, and, even if the fund loses money, the manager still gets paid.
• Costs - Everything from the manager's salary to the investors' statements cost money. Those expenses are passed on to the investors. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative long-term consequences. Remember, every dollar spend on fees is a dollar that has no opportunity to grow over time.
• Dilution - Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
• Taxes - When a fund manager sells a security, a capital-gains tax is made. Investors who are concerned about the impact of taxes need to keep those concerns in mind when investing in mutual funds.
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