A mutual fund is a type of financial vehicle where investors pool their money, and that money is used to invest in assets, e.g. company shares, bonds or other securities.
Mutual funds are very common in the United States, and in a few other countries. In other parts of the world, similar investment schemes exist too, but under other names and with slightly different rules.
The typical mutual fund is managed by a professional fund management company, who make decisions about how to allocate the fund´s assets. For this, the fund management company charges an annual management fee. In some cases, commissions and/or other costs are added as well.
The prospectus for a mutual fund will include information about the fund´s objective and how the fund´s portfolio is structured and maintained to match that objective. It will also provide you with information about costs.
When selecting a mutual fund, it is important to take a look at all the costs associated with using this fund, instead of only looking at the management fee. The costs can have a substantial impact on the profitability of investing in the fund, especially when compound interest is taken into account. Each dollar that you use to pay for these costs is a dollar that could have been invested instead, so paying costs for a mutual fund that doesn´t perform well enough to justify those costs will be very costly in the long run.
One of the reasons why people invest in mutual funds – and agree to pay the costs – is that through a mutual fund, you can get access to professional money management without having to risk a large sum of money. It can also be easier to achieve a desired level of diversification by investing in a fund instead of investing directly. Diversification is an important aspect of risk-management, and the average mutual fund in the United States owns over a hundred different securities.
It is also worth knowing that in the United States, a very large share of all the employer-sponsored retirement plans for employees have the bulk of their money in mutual funds.
Do I get voting rights when investing through a mutual fund?
No. If you buy common shares in a share company, you get shareholder voting rights. If you instead invest in a mutual fund that purchases shares in share companies, you do not get any personal voting rights, since you are not the registered owner of any company shares – the mutual fund is.
For many investors, this is exactly how they want it to be: they do not want to attend shareholder meetings and they want their money to be professionally managed for them.
What does NAVPS mean?
NAVPS = Net Asset Value Per Share
The price of a mutual fund is expressed as the net asset value (NAV) per share (PS). It is the combined value of the fund´s investment portfolio divided by the number of outstanding fund shares.
Typically, the NAVPS for a mutual fund will be announced at the end of each trading day. (Unlike the market price of listed company shares, which will fluctuate throughout the trading day.)
Mutual fund shares can normally be purchased from the fund, and sold back to the fund, for the most recently announced NAVPS. When the fund buys fund shares back from you, it is called redeeming.
How can I profit from investing in a mutual fund?
- If the investment portfolio of the mutual fund increases in value, so does the value of each fund share. This means that it is possible to buy fund shares, and then sell them for a higher price later – if the investment portfolio of the fund has increased in value in the mean time.
- A mutual fund that invests in company shares may receive dividend payments. In the United States, most mutual funds will pass nearly all of this income on to the shareholders of the fund. This is called a distribution.
Similarly, a mutual fund that recieves interest payments on bonds, and/or sells securities that have increased in price, can pass this money on to the fund´s shareholders in the form of a distribution.
Prior to a distribution, it is common for mutual funds to let each of their shareholders chose if they want a cash payout or prefers to re-invest the money in the fund (buy more shares).