6 Replies to “What is mutual funds and describe its types?”

  1. A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund’s underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. Its types are as follows:

    Open-end fund:
    The term mutual fund is the common name for an open-end investment company. Being open-ended means that, at the end of every day, the fund issues new shares to investors and buys back shares from investors wishing to leave the fund.
    Mutual funds may be legally structured as corporations or business trusts but in either instance are classed as open-end investment companies by the Securities regulatory authority.

    Close-Ended Funds:
    Other funds have a limited number of shares; these are either closed-end funds or unit investment trusts, neither of which is a mutual fund.

    Exchange-traded funds
    Main article: Exchange-traded fund
    A relatively recent innovation, the exchange traded fund (ETF), is often formulated as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-end funds. An ETF usually tracks a stock index (see Index funds). Shares are issued or redeemed by institutional investors in large blocks (typically of 50,000). Investors typically purchase shares in small quantities through brokers at a small premium or discount to the net asset value; this is how the institutional investor makes its profit. Because the institutional investors handle the majority of trades, ETFs are more efficient than traditional mutual funds (which are continuously issuing new securities and redeeming old ones, keeping detailed records of such issuance and redemption transactions, and, to effect such transactions, continually buying and selling securities and maintaining liquidity position) and therefore tend to have lower expenses. ETFs are traded throughout the day on a stock exchange, just like closed-end funds.

    Exchange traded funds are also valuable for foreign investors who are often able to buy and sell securities traded on a stock market, but who, for regulatory reasons, are unable to participate in traditional US mutual funds.

    Equity funds:
    Equity funds, which consist mainly of stock investments, are the most common type of mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the United States. Often equity funds focus investments on particular strategies and certain types of issuers.

  2. A mutual fund is a collective investment vehicle that pools money form different investors and inturn invest it in different asset classes like(shares bonds and money market instruments).
    the concept of mutual fund has become popular coz of the advantages it has got..like professional fund management, low costs(transaction costs), reduction in riskliquidity, conveniance and flexibility and most importantly Portfolio diversification.Broadly Mf’s r divided into Open end funds n Closed end funds.
    Open-ended fund

    An open-ended fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the funds net asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.

    Closed-ended fund

    A closed-ended fund issues a limited number of shares (or units) in an initial public offering (or IPO). The shares are then traded on an exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares are high they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value. Further share (or unit) offerings may be made by the scheme if demand is high although this may affect the share price.

    The added element of market forces tends to amplify the performance of the fund increasing investment risk through increased volatility.

    under them different types of funds(most of them are open ended) are:

    Equity funds : where the collected money is invested in equity instruments(shares)

    Debt funds : invested in debt instruments like Bonds, govt and private Bonds etc

    Guilt funds : exclusively in govt. securities

    Fund of funds: invest in other mutual funds where the diversity is maximum and returns are good.

    Money market or liquid funds : which invest in Tresury bills, certificates of deposits(CD’s), commercial papers..which are very short term in nature.

    Commodity funds: which invest in comodities like gold, silver, oil etc

    Any body can invest in mutual funds whether u r salaried or a business man.
    there are different kinds of plans available to u to invest like one time investment and SIP’s . Automatic Reinvestment plans(where the dividends u get will be automatically invested again), Systematic Withdrawl plans(important to realise the profits meaning ull be regularly getting the returns ) ELSS(Equity linked Savings scheme where there will be lock in period of 3 years and ull get the maximum tax benefit with good returns)
    u can start you investment with SIP’s(systematic investment plans) where equal amounts of money is invested every month(say 500 or 1000 every month) for which amount the Mutual fund units are bought..this is the best way of compounding your returns and maximise yr profits in a long term

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