What is Mutual Funds?

Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders.

At the beginning of this millennium, mutual funds out numbered all the listed securities in New York Stock Exchange. Mutual funds have an upper hand in terms of diversity and liquidity at lower cost in comparison to bonds and stocks. The popularity of mutual funds may be relatively new but not their origin which dates back to 18th century. Holland saw the origination of mutual funds in 1774 as investment trusts before spreading to Anglo-Saxon countries in its current form by 1868.

How Mutual Funds Work?

Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares.

Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).

Advantages of Mutual Funds

  • Lowest per unit investment in almost all the cases
  • Your investment will be diversified
  • Your investment will be managed by professional money managers
Laws Governing Mutual Funds

Mutual funds are governed under various laws in US and elsewhere. Basically all these laws are formulated with the protection of the investing community in view. In US Securities and Exchange Commission sets forth numerous requirements for registration and regulation of mutual funds.

These are the various acts subjected to mutual fund
Company Act of 1940
Securities Act of 1933
Securities Exchange Act of 1934

These laws are enacted in order to foster investment culture among general public and protect them from natural and artificial risks. These laws provide basis for their conduct and transaction in a fair and legitimate way. The advantages of mutual funds are mostly exempted from tax deductions.

 

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