How A Mutual Fund Works

How-A-Mutual-Fund-Works

Want to save for a rainy day and don’t know where to keep the extra money? Though investment avenues are multifarious, but more versatile are the reasons for which a person plans to save. Some want to just keep aside a portion of money and use it in the future when a big corpus is created (which is nothing more than sum total of amount saved every year), while others want their money to return to them after increasing.

Age old habit of keeping money in savings account in banks has somewhat lost many of its takers; reasons are many to quote. Interest rates have slashed down in recent times, one of the most popular reasons to begin with. In addition to these, newer investment options have popped up in recent times and performed beyond expectations. So, investing in mutual fund has proved to be an enticing option for those investors who are profit-oriented in thinking, and who doesn’t want extra money.

If you observe closely, people have been saving since times immemorial. Mutual fund companies have just given a systematic garb to the people’s savings habits. When mutual funds were not around, a group of people used to pool together a specific amount from each member, and by the way of lottery they used to declare the beneficiary of the collected money for the month. (This system is still functional at informal level.

Now let’s take a look at the mutual funds that are somewhat analogous to this practice of pooling money. Companies dealing in mutual funds not only collect money from the investors, but also look for premises such as stocks of the companies, debt instruments, and other assets that are considered profit-yielding options. Money invested by the individual investors and pooled together by the fund managers is used for – infrastructural developments, to carry out an ambitious infrastructural project of a company or for bringing some technological innovation – that is of great use to the inhabitants of the country. All these reasons give way to the possibility of earning returns from the money that investors give to their fund managers, from savings point of view.

Investment made in mutual funds grows due to power of compounding and averaging of return-cost ratio. By giving your money to the fund manager to invest, you are handing him over the responsibility of managing your corpus. Thus, he re-invests returns made by your money at a constant rate every year and other returns generated in the form of interest, dividends etc. also keep appending. That is why, there is an appreciable increase registered in the amount you invested at the end of the investment period. This is the main principle behind the working of a mutual fund.

Past performance figures reveal that investors putting their trust in mutual fund investments were able to earn 15-20% returns, on an average. At times, it has grown to as high as 30-40% too. Since there is an intelligent mix of market-oriented and debt-based options in a typical mutual fund, the risk also is comparatively less, as compared to pure equity-based instruments like, stocks.

Thus, by savings in mutual funds, an investor meets a variety of purposes:

  1. He is able to earn extra from his own savings
  2. He is indirectly contributing to the economic development of the country
  3. He is creating extra income for himself to meet the unforeseen expenses
  4. And last but not the least, he is securing his future too.

Costs involved in investing in mutual funds comprise of transaction costs, asset management cost, holding fees and other implied taxes. Thus, the amount that is actually invested is your money minus all the taxes. Mutual funds perform in spite of all these costs, such is the power of compounding. To make more out of your money, it is advisable to keep the money for the long term. So, if you are looking for the investment option that is yielding like a stock but safer than it, then mutual funds prove to be the smartest choice.

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Things to Consider Before You Make Investing Decisions

Things-to-Consider-Before-You-Make-Investing-Decisions

We all want to invest in the best possible ventures, but most of the time, we are not sure about the place we need to invest in. It does become a tricky venture and you must always know the benefits and the reasons of putting your money into the investment. When compared to stocks and debt issues, there may be a difference in terms of returns, but a mutual fund is a much stronger proposition.

Yes, there are lot of benefits when you invest, but are you sure you know all the intrinsic details about the investment? Here is a simple guide towards making your investment the smart way –

  • Figure out your goal well in advance: Many of us do not understand the mechanism of investing and how we should plan it ahead. With every mutual fund, you have to consider the performance of the fund and think about the factors which would cause a fluctuation. At the start of the investment, you need to figure out the growth points and how well it would appreciate over a period of time. How do you figure it out? Monitor the close and far notion points that may cause the performance and then predict what you can expect over the long-term.
  • What is the risk reward present?: Before you place your money into an investment, you need to figure out the risk ratio that is present. Would it be a conservative or aggressive mutual fund? Is it the risk you are willing to take? It would help you know the potential that you can expect.
  • Tax benefits are the icing on the cake: Similar to what you have with stocks and bonds, you can have tax benefits from investing in mutual funds. This should be considered when you are calculating the absolute returns or gains from the mutual funds investment. Consider the dividends and payouts that would be due your way too. Each addition or return on your investment would be significant about the growth of the fund.
  • The fund manager’s capabilities: It is quite important to know who is managing your money at all times, the fund manager should be credible and hold the right expertise. The performance of the fund scheme definitely is based on the quality of the management running it and before you invest; research about their past work and funds. Speak to people to know how well they have done; get to know their abilities from friends too. The market can be a very challenging place and you want to have the best people taking care of your money.
  • Is the long-term plan of the mutual fund investment strong? The best way to choose a fund is by planning it out for the long run. It has to bring returns to the investors and also mark the positives in the market – so choose the right portfolio parameters so that you do not go wrong.

With the right investment goals, you can get the best returns. You have to understand the reasons why the mutual fund would do well and the different support factors that will grow your investment. Your fund managers should be the strongest reason behind you deciding where to invest – it is their guidance and their understanding of the market conditions that will bring out the best for you. If you have been thinking about making money from your savings, there isn’t a better way than mutual funds.

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The Insights of Mutual Funds

The-Insights-of-Mutual-Funds

Determining the correct strategy of investment is a daunting mission, especially for a beginner. Often people jumble up savings and investment. Taking both as the synonym of each other is a flaw. The intention of investing is entirely opposite to that of saving. There is no point in penny-pinching if you are not able to multiply that money. Savings is just the summation of the money you accumulate over the years with a small interest accruing.

The traditional mechanisms of saving have lost their gravity. The continually reducing interest rates along with the narrow scope of accumulating money, have triggered people to switch on more lucrative schemes. To bridge the gulf between savings and investments an ingenious stratagem has been devised- Mutual Fund. Giving a new upsurge to the age-old practice of saving has created a sensation amongst the people. Therefore, mutual fund is magnetizing people to invest rather than merely save. One can say that mutual funds are the best resort for profit-seeking investors as well as security-oriented investors.

Mutual fund incorporates the notion of accumulation from the Co-operatives. Collectively, selling the produce to get an increased return as compared to individual sale is the axis of Co-operatives. Going by the same motto, Mutual Fund is the conglomeration of two words Mutual and Fund, where Mutual means sharing or pooling and Fund means a scheme. Therefore, a comprehensive interpretation of Mutual Fund indicates a plan that promotes joint investment practices to earn exorbitant profits.

The mutual fund companies employ competent fund managers to deploy the pooled money wisely that ultimately touches the zenith of gain. The fund managers judiciously invest the legal tender in variegated schemes which provide capital appreciation and security, contingent according to the call of the investors. Hence, by handing over your hard-earned money to the mutual fund companies, half your tautness is released. From that point, it becomes the obligation of the fund managers for delivering an increased return to meet the requirements of the investors.

The two primary concepts working in full swing behind the scenes to ensure profit maximization are:

  • Cost Averaging
    Is the notion of valuing the worth of a single penny invested. Replenishing the glass drop by drop will always prevent any chances of wastage at the same time, obstructs the likelihood of spilling. Likewise, annexing the investment gradually will always yield unparalleled corpus. For example, if you buy gold at varying valuations, then sometimes you will be able to purchase more quantity and at the other times less quantity for an equal sum invested every time. But, in the end, you will notice that your gains are averaged. Thus, Mutual Fund endorses the proclivity of regular investment in the investors.
  • The power of compounding
    Implies the capacity of the money to grow. Say, suppose a person who commences job at the age of 25 years will contribute more towards his retirement fund as compared to person who beings to work at the age of 35 years. It is quite evident from the example that the early you start the more benefit you will get. Therefore, giving an early start to your investment will surely provide a greater opportunity for wealth accumulation. So, plan and initiate your investment strategy as soon as possible.

Apart from the technicalities, Mutual Fund is the one-stop solution for different expectations of the investors like, accruing a higher return than the traditional saving techniques, accumulating wealth for future, shielding against sudden financial shocks, and the list goes on.

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Mutual Funds

Mutual funds are those professionally managed investment pools that, in a way, show the performance of several varied securities like stocks, bonds, and shares. They are usually organized by an advisory firm for the purpose of offering the fund’s shareholders a specific investment goal.

With this, investors can buy shares of a mutual fund, for instance, the stock of a company. Anyone buying shares in the fund becomes a part owner and wants to take part often because of those investment goals. To manage the company, the shareholders choose a board of directors to oversee the operations of the business and the portfolio.

Most of the time, the value of these mutual funds are calculated once a day and that is based on what the fund’s current net asset value is. A real estate mutual funds is one that invests in the real estate securities from around the world.

The real estate mutual funds usually tend to concentrate the investing strategy on the real estate investments trusts and real estate companies. These real estate investments trusts are mostly companies that purchase and manage real estate with help from the funds that were collected from the investors.

A mutual fund NAV is a special type of company that pools together money from many investors and invests it on behalf of the group in accordance with a stated set of objectives.

Mutual funds raise the money by selling shares of the fund to the public, much like any other company can sell its stock to the public. Funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles such as stocks, bonds, and money market instruments.

Most investors pick mutual funds based on recent fund performance, the suggestion of a friend, and/or the praise bestowed on them by a financial magazine or fund rating agency. While using these methods can lead one to selecting a quality fund, they can also lead you in the wrong direction and wondering what happened to that “great pick.”

The past history is a good indicator, though not a guarantee, that a fund will do well. If you are investing long-term, the history will be of more importance than in a short-term situation as they say lightening rarely strikes the same place twice. When picking mutual funds, you have to rely on the fund manager so researching him/her is also a good idea. The fund is only as good as the one who is in charge of it.

You are probably aware that there are really a variety of investment opportunities available to you. The lower the risk of an investment means the profit won’t be all that spectacular, but sometimes a little gain is enough.

If you want to build a quality portfolio you have to focus on these three things:

  1. The expected return on your investment.
  2. The volatility of the market in that area.
  3. How the performance of the mutual fund is directly linked to other aspects of the market.

Income Funds

These funds attempt to balance higher returns against the risk of losing money. Hence, most of these funds split the money among a variety of investments and plot funds in a mix of equities and fixed income securities.

Therefore, they have greater risk than those of fixed income funds, but lesser risk than those of pure equity funds. Depending upon the goal, an aggressive mix of funds would constitute more equities and fewer bonds, while conservative mix of funds would have fewer equities than bonds.

Bond Funds

Although long-term bond funds have done very well in the recent past, in large part due to declining interest rates, this will not always be the case. Long-term bonds can prove very volatile, with minor changes in the interest rate having an amplified effect on the fund.

Balanced Funds Own both stocks and bonds based on a popular belief that conditions unfavorable to common stocks are many times favorable to bonds and the opposite. They keep a balance between the two funds.

Money Market Funds

One of the reasons why many investors choose money market securities is that the investment can be made for a relatively short period of time. Furthermore, the level of risk is seen as being lower than on capital markets. Therefore, there is a lower risk of loss for someone who invests money into a money market fund as opposed to stocks or mutual funds.

Treasury Bills

T Bills are highly liquid and as such will have bid/ask spreads that are extremely low. Furthermore, those purchasing them will find that they are exempt from municipal and state taxes.

There are some investors who would like to get into money market funds, but find that purchasing them through financial institutions appears to be quite confusing, with all the different regulations and requirements surrounding them. But there is good news for people interested in buying T Bills.

Ordinary investors can actually buy them directly from the U.S. Treasury and there is a lot of information available about this on the Treasury’s website. So for anyone who wants an investment that is easily accessible, this could be an option that is definitely worth considering.

Money funds are also highly flexible, allowing the investor to buy, hold, or sell shares when he or she wishes. There aren’t any market restrictions when it comes to the timing of what you do with what you own. You’ll also be able to use these funds for checks, which can pay the day you write them. Mutual funds, can take three days before payment, making money market funds a better option.

As it is with an individual security, management is an important consideration, and the process of identifying a well-managed mutual fund is much the same. First, look at the fund’s performance over the last five or ten years and compare it to other funds with similar goals. Become familiar with the people on the investment committee.

Then consider what management is doing day-to-day: What are the fund’s largest areas of investment? What holdings are increased or reduced? What percent of the fund is in cash, considering the current state of the market? And what is management saying in its reports? The challenge to the mutual fund investor is selecting an investment company capable of superior performance taking into consideration the fund’s investment goals.

For investors who have a limited amount of time to spend on their portfolios and who want greater diversification, mutual funds are worth considering. But, as with individual stock, your due-diligence is critical, investigate before you surrender your hard-earned money to invest.

Mutual funds are operated by money managers that allow you to invest your money with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to secure on your own.

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Simple Ways to Start Investing in Your 20s

It is usually the start of the year that people think of resolutions that they would like to commit to for the rest of the year. It is not really surprising that financial resolutions are among the top priorities in people’s lists. Recently, a lot of financial experts have been putting emphasis on the importance of saving money for your future while you are in your 20s. A great way to save while you are in your 20s, according to said experts, is to look for investment opportunities. Indeed, the investment market is a very competitive and open way to try to earn money that you can save for your future.

This goes without saying that the best financial strategy is not really to keep all your savings in the bank where it will more likely decrease in value with inflation rate but to make some, if not all, of those savings earn by investing. If you are in your 20s, you might have a lot of hesitations regarding investing. Nonetheless, here are some reasons you should consider:

First, if you are going to make a mistake, make them while you are young.

It is true that investment is a risk. No financial expert will tell you that investing your money is an assurance that you will earn big at any given time. That is why your investment must be coupled with research and understanding. Despite knowledge, however, it is still possible to lose money. But the good news is, you can regain your loss through another investment.

The point is, if you are going to lose, it is actually a good time to lose in your 20s. Being young, you have more opportunities to regain your losses and to learn from your mistakes, prompting you to become a better investor in your next venture. Take risks while you are young and you can earn bigger as you grow older.

Second, invest now, enjoy later.

According to investment experts, people in their 20s should have 80% to 100% of their portfolios invested in stocks for their retirement. One of the advantages of earning while you are young is that you can retire early and enjoy the fruits of your labors. Rather than spending all your retirement savings on medical or hospital bills due to health complications, most likely caused by stress from work, one can retire early with a hefty bank account and travel around the country or even around the world.

Third, you can make a career out of investing.

Another good thing about finding investment opportunities is that the right investment opportunities can actually be turned into successful careers. This is a job where one does not to stay eight hours a day in an office looking through stacks of reports and typing in the computer because investments can now be monitored online. You can actually monitor your investments while enjoying the beach and that is the best way to kill two birds in one stone.

There are probably a hundred more reasons to start investing but if you can have at least three, the reasons above are the most common that financial and investment experts always say.

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Investment Decisions

Expansion and Diversification

A company may add capacity to its existing product lines to expand existing operation. For example, the Company Y may increase its plant capacity to manufacture more “X”. It is an example of related diversification. A firm may expand its activities in a new business. Expansion of a new business requires investment in new products and a new kind of production activity within the firm. If a packing manufacturing company invest in a new plant and machinery to produce ball bearings, which the firm has not manufacture before, this represents expansion of new business or unrelated diversification. Sometimes a company acquires existing firms to expand its business. In either case, the firm makes investment in the expectation of additional revenue. Investment in existing or new products may also be called as revenue expansion investment.

Replacement and Modernization

The main objective of modernization and replacement is to improve operating efficiency and reduce costs. Cost savings will reflect in the increased profits, but the firms revenue may remain unchanged. Assets become outdated and obsolete with technological changes. The firm must decide to replace those assets with new assets that operate more economically. If a Garment company changes from semi automatic washing equipment to fully automatic washing equipment, it is an example of modernization and replacement. Replacement decisions help to introduce more efficient and economical assets and therefore, are also called cost reduction investments. However, replacement decisions that involve substantial modernization and technological improvements expand revenues as well as reduce costs.

Another useful way of classify investments is as follows

  • Mutually exclusive investment
  • Independent investment
  • Contingent investment

Mutually exclusive investment

Mutually exclusive investments serve the same purpose and compete with each other. If one investment is undertaken, others will have to be excluded. A company may, for example, either use a more labor intensive, semi automatic machine, or employ a more capital intensive, highly automatic machine for production. Choosing the semi-automatic machine precludes the acceptance of the highly automatic machine.

Independent investment

Independent investments serve different purposes and do not compete with each other. For example, a heavy engineering company may be considering expansion of its plant capacity to manufacture additional excavators and addition of new production facilities to manufacture a new product light commercial vehicles. Depending on their profitability and availability of funds, the company can undertake both investments.

Contingent investment

Contingent investments are dependent projects; the choice of one investment necessitates undertaking one or more other investment. For example, if a company decides to build a factory in a remote, backward area, it may have to invest in houses, roads, hospitals, and many more. For employees to attract the work force thus, building of factory also requires investment in facilities for employees. The total expenditure will be treated as one single investment.

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