What Are Mutual Funds?

Mutual Funds are a group of stocks and bonds that are pulled together in a portfolio and pooled for diversified investment. The fund shares of the portfolio to a large number of people who have two mutual interests. The first goal is to make money on their investments and the second goal is to diversify their investments so all the risk is not in one place. Every investor in the fund shares expenses and profits.  This mutual sharing of purchasing power and risk as well as returns allows each investor to access a much greater diversity and stability of investment securities than they could on their own.

How do you make money on mutual funds?

Well that’s a fair question and there is a good answer. The money comes to the investor in three ways.

1.It is earned from the dividends on stocks in the portfolio and from interest payments on bonds in the portfolio.
2.When the stocks in a portfolio increase in value they may be sold for a profit. The profit is called capital gains and is distributed to the shareholders.
3.If the value increases but the fund manager does not sell it, the individual shares of the fund increase in value and can be sold back to the fund.

You can choose to receive a check for your share of distributions or you can have the profits from your shares reinvested in the fund.

Three basic types of mutual funds.

There are thousands of funds but all of them will actually fit into one of the three main categories. The basic types of funds are: