Mutual fund are a collection of stocks, bonds or other securities that are owned by a group of investors and they are managed by a professional investment company. Most professional investors agree that it is smarter to own a wide variety of stocks and bonds than it is to gamble on the success of a few. However diversifying can be rough, because buying a portfolio of individual stocks and bonds con get expensive. Just trying to figure out what to buy and when to buy it can turn into a full-time job.
This is where mutual funds offer one solution: When investors put money into a fund, it is pooled with money from other investors to create a much greater buying power than it would have if the investors invested the money on their own. Because a fund can own hundreds of different securities, its success isn’t dependent on the success of how one or two holding do. Also the funds professional managers keep a close eye on the markets, and they adjust the portfolio for the strongest possible performance.
A mutual fund makes money in two ways: by earning dividends or interest on its investments and then by selling investments once they have increased in price. The fund then pays out its profits to its investors, minus fees and expenses. Most funds offer investors the option of reinvesting all or part of their distributions in the fund. The funds investors pay taxes on the money they receive from the fund regardless of whether the money is reinvested or paid out in cash. However if a fund loses more than it make in any given year, it can offset future gains. Until profits equal the accumulated losses, distributions aren’t taxable, although the share price might increase to reflect the profits.
Mutual funds are created by investment companies, brokerage houses and banks. The number of funds an investment company offers can vary from as few two or three on up to thousands. each of these funds has a professional investment manager, an investment objective, along with an investment plan. The fund are marketed to potential investors with ad in the financial press, through direct mailings and press announcements, and in some instances with brokers that make a commissions selling them.