A mutual fund is a pool of money that is formed collectively from many investors and invests money in stocks, bonds, money market instruments, and other securities (can be Government securities)
Types of Mutual Funds (based upon structure)
• Open-Ended Funds: They meet the true definition of a mutual fund and are closer than the closed ended funds in definition. It has a financial intermediary that allows investors or group of investors to pool their money together to meet an investment objective, basically to earn profits.
• Closed-Ended Fund: The financial Securities that is traded on the stock market. It issues a fixed number of shares in an initial public offering which are traded on an exchange. Share price is determined by the investor’s demand not by the total net asset value. Money is raised through either by a mutual fund company or an investment dealer commonly known as underwriting to create a fund with specific objectives for investment. The funds are managed by a highly qualified investment manager.
Why mutual funds:
• Diversification: A large amount of cash is not needed to create individual portfolios; by purchasing mutual funds one is provided immediate benefit of instant diversification and asset allocation.
• Flexibility: They provide flexibility to switch from one portfolio to the other.
• Professional Management: With the purchase of a mutual fund you are also choosing a professional manager. The manager uses the money to buy and sell stocks with the expertise that he/she has.
• Liquidity: It gives the ability to get in and out easily in general. Mutual funds can be sold in a short time period without there much being a difference in the sale price and the current market value.