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Investing in Mutual Funds

Article Summary: Mutual funds are financial intermediaries that collect funds from individual investors and invest these funds in various kinds of securities and/or other assets. Investing in mutual funds provides the benefits of large-scale investing to the small investor. By investing in mutual funds of an investment company, the investor contributes to the pool of assets created by the investment company. The investor's claim in the portfolio established by the investment company is proportional to the amount invested.

Mutual Funds

Mutual funds are financial intermediaries that collect funds from individual investors and invest these funds in various kinds of securities and/or other assets. Investing in mutual funds provides the benefits of large-scale investing to the small investor. By investing in mutual funds of an investment company, the investor contributes to the pool of assets created by the investment company. The investor's claim in the portfolio established by the investment company is proportional to the amount invested.

While all investment companies pool assets of individual investors, they also need to divide claims of those assets among those investors. By investing in mutual funds of investment companies, the investors buy shares in these companies and ownership is proportional to the number of shares purchased. The value of each share is called the net asset value or NAV. Net asset value equals assets minus liabilities expressed on a per-share basis.

Open-end and Closed-end Mutual Funds

By investing in open-ended mutual funds, the investors have an option to "cash out" their shares at the net asset value at any time. They can also buy new shares. Open-end funds can be redeemed or issued readily at their net asset value. Therefore, the unit capital of an open-ended mutual fund keeps varying over time. The term "mutual funds" refers to open-end mutual funds only.

In contrast, by investing in closed-end mutual funds, the investors do not get to redeem their shares all the time. They can get it done only on maturity. New shares too wont be issued. The investors can, however, cash out by selling their shares to other investors. Shares of closed-end mutual funds are traded on organized exchanges and can be puchased through brokers. Their prices can differ from their net asset value. Hence the closed-end mutual funds are less popular when compared to open-ended mutual funds. Therefore, investing in open-ended mutual funds is better than investing in closed-ended mutual funds.

Investment companies perform several important functions for their investors:
1. Lower transaction costs. Because they trade large block of securities, investment companies can achieve substantial savings on brokerage fees and commissions.
2. Professional management. Many, but not all, investment companies have full-time staff as security analysts and portfolio managers who attempt to achieve superior investment results for their investors.
3. Diversification and divisibility. By pooling their money investment companies enable individual shareholders to hold fractional shares of many different securities. They can act as large investors even if individual investors cannot.
4. Record keeping and administration. Investment companies issue periodic status reports keeping track of capital gains distribution, dividends, investments and redemptions and they may reinvest dividend and interest income for shareholders.

Therefore, investing in Mutual Funds helps investors to obtain the benefits of large-scale investing.

Article Source: http://www.upublish.info

About the Author:
Dilip Mohan
To know more about investing in mutual funds visit Investing in Mutual Fundsand to understand how mutual funds work visit Mutual Funds