A Guide to Mutual Funds
Posted: Jun 27, 2019
What are Mutual Funds?
A Mutual Fund is a type of investment fund that pools together a huge collection of money from different investors to purchase or invest in, securities like stocks, bonds, and other assets. These investment funds are managed by professionals who distribute the fund’s assets and attempt to yield capital profits or income for the investors of the fund. The money pooled into the fund is further used to buy other securities.
The value of the mutual fund's company is estimated by assessing what are going to be the yields of the securities bought. For example, if you invest in a mutual fund and it ends up buying many securities, sometime later the price of these securities will increase. The fund manager can then sell these securities at a profit and you end up getting a share of the profits through distribution. Now, you have to remember that since this is technically a source of income, there is a tax on the money you make through Mutual Funds.
Another thing that you should know about when you are starting to venture into the world of mutual funds is the systematic withdrawal plan. But what is a systematic withdrawal plan? It is a financial tool using which you can withdraw a fixed amount of money from your mutual fund monthly, quarterly, or even annually. According to this system, you can only withdraw money in installments and not lump sums.
This method is good for anyone who is looking for some extra income. The practicality of this plan is that, since you can withdraw it any time of the month, the money will come in handy if there are any sudden plans or emergencies. Another advantage of availing this plan is that it is not taxable, or at least the money withdrawn isn’t, but, if there is a capital gain to this money, it will be subject to deduction. It is here that you should note that, with every withdrawal you make, the value of your investment in the mutual fund decreases by the market value of the number of shares you have withdrawn.
At some point during your quest to invest in mutual funds, you must wonder what exactly constitutes a mutual fund minimum investment. The Minimum investment amount constitutes the least amount of money that you are willing to invest in companies and start-ups. The actual amount is usually pretty low. This allows a lot of people to invest in companies readily. For some companies, the minimum investment amount is as low as 100 bucks while some other might cost you around Rs 500 or above.
Mutual funds are of many kinds. A mutual fund dividend, for example, will aim towards returning some profit or dividend to the investor. The dividend is essentially defined as the profit or the proportion of a profit gained by the mutual fund due to the performance of the securities it invested in. The Asset management company adds these gains to the Net Asset Value of the shares.
The decisions about whether to re-allocate the funds or return it as dividends are made by the fund manager. The dividend can be paid monthly, weekly, quarterly or even annually. If the dividends are from an equity scheme, where the investors pool together the money as shares to own a company, the dividends are tax free but if the dividend is from a debt scheme, that is, where the investors are actually lending out money for the company at a fixed interest rate, then it is tax deductible.
Here's a little bit about myself. I've done a Masters in Economics and teach the subject to high school students. I am 32 years old and married to an investment advisor. A Dhoni fan who loves to play football! I am a sports enthusiast and a firm beli