A Mutual fund is an investment option at its baseline and also a company. Got confused? Don’t be. To put it simply, a mutual fund is a company that is incorporated to provide investment options to the general public.
A mutual fund company is in the business of making investments on behalf of the people who contribute to the mutual fund. You can say that a mutual fund investor gets ownership in the mutual fund company, in proportion to his contribution to the same.
Looking at it from an investment option perspective, the mutual fund manager allocates the funds to a curated portfolio. Such a portfolio can include only stocks, only bonds, or a combination of both as long as it aligns with the objectives of the company.
How would you earn as an investor in a Mutual fund?
You will earn from the dividends received on stocks and interest on bonds that are held in the fund’s portfolio. A mutual fund company tends to distribute all of the earnings it made in a given year to its investors. Mutual fund investors can also choose either to receive their earnings or to reinvest them back into the fund and get more shares.
When the price of securities increases, the company might sell them to get a capital gain. Whereas if they are not sold, the fund’s shares increase in price. Mutual fund shares are also saleable for a profit in the open market.
Such profit, premium, and capital are acquired together to structure your disseminations or in less difficult terms, your yearly income from your common asset venture.
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How does a Mutual fund work as a company?
By now, you must have understood that every mutual fund has a fund manager whose task is to manage the funds and invest them in the best possible securities. He is expected to have expertise in financial markets and financial instruments.
A fund manager is often the CEO of a mutual fund company who is hired by its Board of Directors. The fund manager also known as the investment advisor is also an owner of the fund. He is assigned to work in the best interest of the mutual fund investors.
Hence, he takes the assistance of competent financial analysts when it comes to choosing investments, curating the portfolio, or conducting market research. Just like any other business company, a mutual fund needs to keep a fund accountant who computes the Net Asset Value (NAV) of the fund and keeps a check on the daily value of the portfolio as the share prices vary.
A mutual fund company also requires a compliance officer who makes sure that the company runs following the government regulations. These are the essentials when it comes to the smooth working of a mutual fund.
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