Mutual funds refer to the pool of money collected from investors which will be used to buy securities such as stocks, bonds, short-term debt, and other assets. In other words, these are funds that come from different investors who mutually agreed to invest their money to buy or sell the said marketable securities to generate profit. These purchased securities form part of the holdings called a portfolio. All investors in the fund own a share of these holdings.
Mutual funds are professionally managed by fund managers through the allocation of the fund’s assets to acquire capital gains for the investors. Mutual funds are both an investment and a company. For instance, when a mutual fund investor buys a Google stock, it will acquire partial ownership or share of the company and its assets. Thus, the main goal of the mutual fund company is to do investments to gain from the business where it has invested.
Some of the types of mutual funds are equity funds, index funds, fixed-income funds, and balanced funds.
How mutual funds generate income?
- The fund’s portfolio earns income from the dividends on stocks or from the bond’s interests.
- Payouts are usually given to fund owners annually in a form of distribution with the options of whether to withdraw or reinvest again.
- The securities that have increased in price can be sold to generate capital gains.
- The holdings that are not sold will increase their price then the fund manager can sell them in the future with higher prices for profit.
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