Given the fact that investors usually do not find enough time, or possess enough knowledge, to get involved in investment planning, mutual funds are emerging as coveted instruments for fetching good returns.
What is a Mutual Fund?
Mutual funds are usually in the form of funds collected from several investors with the intention of increasing their savings profile and offering viable returns on the invested amount. Wondering about how to invest in mutual funds? Well, before you delve deeper into this interesting world of investments and savings, do know that putting your money in mutual funds can be a much easier option than handling most other items in your portfolio.
In case of mutual funds, each investment is closely monitored by efficient professionals; particularly those with a primary motto of creating a fruitful portfolio. The portfolio can be composed of shares, bonds, money market tools, or a blend of all these.
Ownership of Funds
As a mutual funds investor, the shares of a specific mutual fund are surely owned by you; but you do not own the individual securities that are making it to the portfolio of mutual funds managers. To understand better, note that your mutual funds investment would allow you to invest small volumes of money, but then, you get the opportunity of benefiting from a huge pool of money put in by other investors as well. These huge pools of money are then used for making further investments in securities, bonds and other instruments with guaranteed returns. Here, all shareholders are equal participants in the funds’ profits and losses in proportion to the amount of their investment.
Closed-End Funds and Open-End Funds
A closed-end fund is a type of fund that possesses a definite volume of outstanding shares and works for a specific period of time. The period basically ranges from 3 years to 15 years. These funds are open for subscription for a limited time frame and deal with an even balance of stock sellers and buyers. They are traded over the counter in a manner similar to any other stock on the exchange. Generally, such investments are featured with specified redemption features to signify that they will get terminated on definite dates.
Open end mutual funds are those types of funds that are widely available for investments throughout the year and are not listed on any stock exchange. Most mutual funds are open-ended funds where investors enjoy the flexibility of buying and selling their portion of investments at any point of time; and at a price related to the fund’s NAV.
How to Calculate the Fund’s NAV?
Net Asset Value or NAV means the market value of the units in a fund. It is a perfect means of gathering information about a particular fund’s performance. The assets in mutual funds generally fall under two types: securities and cash. Here, securities indicate both shares and bonds. Thus the total asset value of a mutual fund is composed of its stocks, bonds and cash. The liquid assets, dividends, and accrued interests are also included in asset calculation. While determining liabilities, the money owed to creditors and other accrued expenses are also included.
The formula of Net Asset Value (NAV) is as follows:
NAV = (Assets-Debts) / Number of outstanding units
Where, Assets = Mutual funds investments’ market value + Accrued income + Receivables
Debts = Liabilities + Accrued Expenses
Why Should You Choose to Invest in Mutual Funds?
No matter what you opt for – investment convenience or financial gains, mutual funds have several benefits on their cards for you.
- Mutual fund investments allow you to create enhanced inflation adjusted returns; they do so even when you fail to put in a lot of energy and time in the investment process.
- Mutual funds are always backed by an efficient and devoted research team. Experienced fund managers are bestowed with the task of dealing with financial decisions on the basis of market performance and future prospects.
- Mutual funds serve to be an ideal choice when you consider their time saving and convenience features.
- These investments are charged pretty low in comparison to other direct investment processes in capital markets.
- Mutual funds provide ample investment opportunities to investors with limited capital but with a strong eagerness to invest.
- Investors enjoy the benefits of swiftly acquiring their money back (as per the NAV) in case of open end funds.
- Mutual funds possess the potential of generating higher returns on the basis of long or medium term investments.
All forms of mutual fund investments are accompanied with risk, but efficient management and choice of the most competent securities serve to be the key to success.
Go for mutual funds, you will be glad to see smart returns coming in safely and securely.