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How You Make Money in a Mutual Fund

By Edited Jun 2, 2015 0 0

Have you ever thought of how to start investing? Mutual funds, which are sometimes called unit trusts, could be a good starting point for those who do not know much about investment particularly investing in the capital market. Before I go straight to what mutual fund is, it will be a good idea if I introduce us to the capital market. The capital market, which is also referred to as the stock exchange, is a highly organised market place that  provides facilities for buying and selling of shares, debentures and bonds. A very good example of a capital market is the London Stock Exchange. In fact, every country must have a stock exchange because it provides investment opportunities. Stock exchanges also help in raising capital for development.

Generally, a mutual fund is a collection of stocks and bonds which is managed on behalf of investors by a professional investment company. The investment company is known as the fund manager and it sells units of shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with other unit holders of the fund. As people purchase units of shares from the investment company, the fund manager invests their money. But it should be noted that mutual funds are set up with a specific strategy and goal in mind, and their distinct focus can be choosing between large or small company stocks, government or company bonds, and a choice of stocks in certain countries. The advantage of a mutual fund is that you can invest your money in it even if you do not have the time or experience that is often needed to choose a sound investment. This enables you to be part of a group of investors who pay a professional manager to select specific securities and invest on their behalf. With this, you should get a better return on your investment than you would if you were to choose investments yourself.

Mutual funds aim to make money. But how exactly does a mutual fund make money in its portfolio? Mutual fund makes money when
1.    a fund manager sells its stocks or bonds for more than the purchased price. Thus a profit or capital gain is recorded.
2.    it receives cash dividends or bonuses issued by the companies whose shares were subscribed or purchased on the floor of the stock exchange.
3.     it gets interest on purchased bonds.

On daily basis, the fund manager finds the value of all the fund's holdings and figures out how many units of shares have been purchased by unit holders. It then calculates the Net Asset Value of the mutual fund. This routine is repeated everyday, which is why some mutual funds are sometimes called open-end funds. If the fund manager is doing a good job, the Net Asset Value of the fund will increase and get bigger. This makes your units of shares in the fund to increase in value and give you a higher monetary return on your investment when you sell.  Certain mutual funds are required to buy back shares whenever owners want to sell. In this case, you can sell your units of shares to the fund manager whenever you wish. You also make money when the fund manager pays out cash dividends in proportion to the number of shares you own in the mutual fund.

    Zazzauline.

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