A mutual fund is an investment vehicle which pools the money of many investors and invests their money in stocks, bonds, and other securities. The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. The securities purchased are referred to as the fund’s portfolio which represents a portion of the holdings of the fund. When you give your money to a mutual fund, the fund manager invests your funds, along with the money contributed by the other shareholders.
Unlike stocks, whose value fluctuates by the minute, the value of the mutual funds is priced at the end of each day. The value of a fund is expressed in terms of its “net-asset value”, also known as NAV. NAV is basically the fund’s total value of it’s portfolio divided by number of shares outstanding. At the end of each day, the fund manager totals up the value of the holdings and then calculates the NAV of the mutual fund for that day.
Diversification is one of the key reasons for investing in mutual funds. With a mutual fund investment, it gives investors an affordable way of gaining access to a wide range of investments that would be very difficult and time-consuming to purchase and manage individually. Because mutual funds generally hold 50 to 100 types of investments, the risk is reduced. The Fund’s value should not fluctuate as widely as the price of an individual stock.
Unfortunately, funds don’t always make money on a continuous basis. Keep in mind that just because a fund had excellent performance last year does not necessarily mean that it will duplicate that performance. The value of your mutual fund shares will rise and fall depending upon the performance of the securities in the portfolio. If the fund managers made some investments that didn’t work out, it can drive down the price of that particular mutual fund.
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