What is Mutual Fund?

You might be wondering what is mutual fund. Understanding what it is and how it works should be the first thing you do before betting any money into it. A mutual fund is a pool of investors' money into multiple types of investments, known as the portfolio. Stocks, bonds, and money market are examples of the types of investments that make up a mutual fund.

Mutual funds are managed by professional fund managers who will choose securities and decide either to buy or sell the stocks for the most effective growth. This what is mutual fund all about, the easiest entry to the stock market.

As a mutual fund investor, you can either earn dividends or NAV appreciation when there are profits; but if there are losses, your NAV will decrease in value.

Mutual funds are, by nature, diversified. These mean they are made up a lot of different investments. That tends to lower your risk (avoiding the old "all of your eggs in one basket" problem) from any particular stocks or types of investment.

And, because someone else is managing them, you don't have to worry about diversifying the individual investments yourself or doing your own research. That makes it easier to just buy and forget about them.

Since the fund manager's compensation is based on how well the fund performs, you can be assured they will work diligently to make sure the fund performs well. Managing the funds is their full-time job!

Mutual funds can be either open-ended or closed-ended. Open-ended means that funds are issued (or sold back to the fund) whenever anyone wants them. With closed-ended funds, only a certain number of shares can be issued for a particular fund, and they can only be sold back to the fund when the fund itself terminates. However, you can also sell the closed-ended funds to other investors as well.


Load refers to the sales charges added to a mutual fund when you purchase it. The load charge goes to the fund salesperson as a commission and payment for their research services. Load charges can be as high as 8.5 per cent of the selling price. It can be figured in as a front-end load (you pay it when you buy the mutual fund) or a back-end load (you pay when you sell the mutual fund).

Many mutual funds are no-load funds. That means there is no sales fee charged and the fund is direct-marketed to you, so you can buy it without the help of a salesperson. With the wealth of information on the Internet today, it is certainly easier to make smart choices yourself to save money on the charges.

In addition to no-load funds, there are also funds that charge up to 3.5 percent as a sales fee. These are called low-load funds and can still be a good deal.

What is mutual fund made from?

Well, generally, they are invented from these three categories:

• Equity funds are made up of investments of only common stock. These can be riskier (and earn more money) than other types.
• Fixed-income funds are made up of government and corporate securities that provide a fixed return and are usually low risk.
• Balanced funds combine both stocks and bonds in the investment pool and offer a moderate to low risk. While low risk may sound good, it is also accompanied by lower rates of return-meaning you risk less, but your investment won't earn as much.

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