As a mature instrument, mutual funds are a popular way to invest. A mutual fund can not only help you create a diversified portfolio but also give you access to professionally managed funds.
By answering several top questions, we attempt to provide more help before you invest.
1. How mutual funds work?
A mutual fund is an open-end investment company that pools money from many investors and invests the money in various assets by a qualified investment adviser.
Mutual funds are required by law to price their shares each business day, which is called daily net asset value(NAV).
Each mutual fund share represents the ownership of the mutual fund and associate returns. Investors can directly buy/redeem shares from mutual funds or through a brokerage account.
2. How to get returns in mutual funds?
Dividends. A mutual fund may distribute dividends derived from securities in its portfolio.
Capital gains. Capital gains refer to profits realized on the sale of securities. When a mutual fund sells a security that has increased in price, the mutual fund has a capital gain.
At the end of the year, most mutual funds distribute these capital gains (minus any capital losses) to shareholders.
NAV appreciation. If the market value of a mutual fund's portfolio increases, then the NAV of the mutual fund will appreciate accordingly.
3. How to buy and sell mutual funds?
Investors can buy mutual fund shares from the fund itself or through the broker for the fund, rather than buying from other investors. Mutual fund shares are "redeemable", which means that investors can sell their shares back to the fund at any time.
Please read the prospectus carefully before buying shares in mutual funds. The prospectus contains information about the investment objectives, risks, performance and expenses.
4. What is sale and redemption price?
The price or NAV a shareholder is charged while investing in an open-ended mutual fund is called sale price.
Redemption price is the price or NAV at which an open-ended mutual fund redeems its shares from the shareholders. It may include exit load, if applicable.
5. Can mutual funds offer guaranteed returns?
There is no guarantee of returns on mutual funds.
In addition, past returns can't guarantee future performance, because the value of mutual funds will rise or fall as the prices of the underlying securities change.
6. What fees should I pay for a mutual fund?
Mutual fund fees generally fall into two categories: shareholder fees and annual fund operating expenses. They are disclosed in the fee table in the front of a fund's prospectus.
In the fee table, under the heading of "Shareholder Fees," you'll find some or all of the following items:
Under the heading of "Annual Fund Operating Expenses," you'll find some or all of the following items: