A mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. For an individual investor, having a diversified portfolio is difficult. Mutual funds helps the individual investors to invest in equity and debt securities simultaneously. When investors invest a particular amount in mutual funds, he becomes the unit holder of corresponding units. In turn, mutual funds invest unit holders’ money in stocks, bonds or other securities that earn interest or dividend. This money is distributed to the unit holders. If the fund gets money by selling some stocks at higher price the unit holders are liable to get the capital gains.
Investors generate returns through mutual funds in the following ways:
Mutual funds invest in securities with high growth potential or in companies available at attractive market valuations. The NAV of a mutual fund varies following the stocks held by it. So, when there is a net increase in stock prices held by a mutual fund, the NAV of that mutual fund also increases accordingly giving the benefit of capital appreciation on the units held by its investors. Investors can redeem their mutual fund units at higher NAV and realize capital appreciation.
Depending on the fund type an investor buys, they benefit from dividends declared by portfolio companies, interest earned from portfolio bonds and other earned income. Investors can choose to receive distributions or simply reinvest the amount in the fund. As an investor, you have to ask the fund house to receive distributions in cash since they usually reinvest the money in the fund.
