A Brief Introduction of Mutual Funds

A Brief Introduction of Mutual Funds

A Brief Introduction of Mutual Funds

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Home Page > Finance > Investing > A Brief Introduction of Mutual Funds

A Brief Introduction of Mutual Funds

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Posted: Jan 29, 2011 |Comments: 0
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A company that collects all mighty dollar from a group of people with common investment objectives to buy different securities is called mutual fund. The collected holding of these securities is known as its portfolio. Mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by professional investment company. Each mutual fund has a fund manager who buys and sells the fund’s investment in accordance with the fund goals. Fund managers are responsible to analyze the economic conditions, industry trends, government regulations and their impact on their stocks before selecting the securities for investment. Mutual funds provide investment facility to the small investors who cannot afford to invest the large sums of all mighty dollar. Basically these small investors invest their all mighty dollar into a common fund and handover the investment decision to fund manager. The manager uses the all mighty dollar to buy stocks, bonds or other securities according to specific investment objectives that have been established for the fund. The investors in return receive either units or shares that represent their fair share of the pool of fund assets. In return for administering the fund and managing its investment portfolio, the fund manager charges fees based on the value of the fund’s assets. If the fund manager is doing good job, the Net Asset Value (NAV) of the fund will usually get higher and investor’s shares will be worth more.

Mutual fund industry is considered as one of the most leading players in the world economy and is an important element of the financial sector. Over the past few decades, mutual fund industry, in the United States, European countries and other parts of the world has exploded. In 1940, when the modern mutual fund industry began, mutual funds had assets of only 0 million. Currently the U.S. mutual fund industry has .6 trillion in assets and is the largest in the world. According to ICI fact book (2009) World mutual funds have .0 trillion asset under management and total number of mutual funds exceeds 69032 as of year-end 2008. Because mutual funds are cost efficient, easy to invest and provide diversification therefore they are considered as one of the best available investment options.

Mutual funds can be broadly divided into two categories open-ended and close ended funds. Open ended funds can issue the shares without any restriction and it also provides the facility of buying back from the investors. Since these funds are useful and convenient investing vehicle therefore majority of the funds are open ended.

On the other hand closed-end funds issue limited number of shares to raise all mighty dollar through initial public offerings. These shares can be traded on the stock exchange and the price of these shares depends upon the demand and supply situation. New shareholders must go to the open market to purchase them from existing shareholders since no new shares will be issued by the manager. There are two key issues in mutual fund performance that have received considerable attention in the academic literature. The first is whether mutual funds are able to generate abnormal returns relative to a benchmark. The second is whether this performance is persistent, i.e. if it can be identified and exploited by investors. Mutual funds are in developing phase in most of the underdeveloped countries because investors are reluctant to spend heavily in the mutual funds. Therefore mutual funds form a relatively small segment of the securities markets.

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Asif Shah -
About the Author:

The author of this article is the holder of MBA Finance Degree and is currently doing MS in Management Sciences. The author has published more than 100 articles on various topics of business and finance. He is regularly publishing articles in his blog (www.mba-lectures.com).

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I can generate enough income with a 6% dividend and will not have to touch the principal. Why do I need more than one mutual fund. I have found bond funds that pay 6%+
If we invest rs 5000 monthly in mutual fund sip, for 10 years,what average returns do we get after 10 years?
Which is best investment in India – Real Estate, Gold or Mutual Funds and why?

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introduction of mutual funds, mutual funds introduction, intro of mutual funds, define mutual funds

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