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A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.
Mutual funds are a popular choice among investors because they generally offer the following features:
• Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
• Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
• Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
• Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.
All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.
A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk.
You will get a list of documents required for account opening from the DP. Make sure you provide the correct documents to avoid your application getting rejected
Mutual fund shares are “redeemable,” meaning investors can sell the shares back to the fund at any time. The
fund usually must send you the payment within seven days.
Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information
about the mutual fund’s investment objectives, risks, performance, and expenses. See How to Read a Mutual
Fund Prospectus Part 1, Part 2, and Part 3 to learn more about key information in a prospectus.
As with any business, running a mutual fund involves costs. Funds pass along these costs to
investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high
costs must perform better than a low-cost fund to generate the same returns for you.
Even small differences in fees can mean large differences in returns over time. For example,
if you invested $10,000 in a fund with a 10% annual return, and annual operating expenses of 1.5%, after
20 years you would have roughly $49,725. If you invested in a fund with the same performance and expenses
of 0.5%, after 20 years you would end up with $60,858.
It takes only minutes to use a mutual fund cost calculator to compute how the costs of
different mutual funds add up over time and eat into your returns. See the Mutual Fund Glossary
for types of fees.
By law, each mutual fund is required to file a prospectus and regular shareholder reports with the SEC. Before you invest, be sure to read the prospectus and the required shareholder reports. Additionally, the investment portfolios of mutual funds are managed by separate entities know as “investment advisers” that are registered with the SEC. Always check that the investment adviser is registered before investing.