How do Mutual funds work

Every mutual funds works almost the same. The investment company that represents the mutual fund sells shares to investors to later invest the funds in a stock portfolio. When joining these funds given by investors a fund manager can diversify buying of different valuables such as stocks for the stock fund or bonds for the bond funds. The objectives of funds determines the type of investment to choose.

For example if the objective of the stock fund is to provide capital appraisal the fund invests in growth stocks. Equally, bond funds with the objective of providing free of tax interest at a federal level invests in municipal bonds. The fund buys different municipal bond issues to get a diversified portfolio which reduces loss risk because of negligence.

The earned interest because of stock investments is paid to each shareholder as dividends. An investor that invests $1000 gets the same return rate as one that invests $100,000 in the same fund except that that whom invests more gets 100 times more (it is proportional to the funds held in the fund).

When stock prices in the portfolio fluctuate the total value of the fund is affected. Many different factors such as intrinsic risks of determined stock types cause prices to fluctuate. The objective of the funds are important because they indicate the investor the type and quality of the investment that funds choose to carry it out.

From these objectives investor can weigh better the type of risk the fund has decide to take to better incomes and capital profits.

Investment companies offer four types of funds:

  • Open-end mutual funds
  • Closed-end mutual funds
  • Unit investment trust (UITs)
  • Exchange-traded funds (ETFs) (exchange-traded funds are mostly sponsored by brokerage firms and banks).