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  1. What are Mutual Funds?
  2. Advantages of Mutual Funds
  3. Disadvantages of Mutual Funds?
  4. Different types of Mutual Funds
  5. More types of Mutual Fund
  6. How to choose Mutual Funds
  7. How to buy and sell Mutual Funds
  8. Tracking your Mutual Funds
  9. Frequently Asked Questions on Mutual Funds

Mutual Funds: What are Mutual Funds?

Mutual funds are one of the best investment ever created for individual investors. But before you can understand what a mutual fund is, it is important that you have a basic understanding of stocks and bonds (Check out our Stocks and  Bonds Section). A mutual fund is nothing more than a collection of stocks and/or bonds managed by an investment company. Mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities. Therefore, several hundred million to a billion dollars are invested along with your money by the company. Each investor owns shares, which represent a portion of the holdings of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest.  You also get the same level of professional management of your money without having to have millions of dollars.

 

The total return on mutual funds are based on three things:

  1. Income - Income is earned from dividends on stocks and interest on bonds. To distribute the income it receives over the year, a fund pays nearly all of this income to fund owners in the form of a dividend. With mutual funds, you have a choice of either to receive a check for dividends and distributions or to reinvest the earnings and get more shares. Dividends are taxable whether or not you reinvest them as additional shares in the fund (unless they come from tax-free municipal bond fund or it's a retirement account)
     
  2. Capital gains distributions - If the fund sells securities that have increased in price, the fund has a capital gain, which is usually paid to investors in the form of a distribution. Funds typically pay one annual capital gains distribution in December, but distributions can be paid multiple times per year. As with dividends, capital gains are taxable whether or not your reinvest them in additional shares in the fund.
     
  3. Share price change -  You also make money with a mutual fund when the share price increases. This happens when fund holdings increase in price but are not sold by the fund manager (thus, not incurring capital gains), the fund's shares increase in price. You can then sell your mutual fund for a profit.

Next-->>  Different Types of Mutual Funds


**Recommended Reading**

cover

All About Mutual Funds
Everything you'll need to know about Mutual Funds including finding the best funds for your needs.

Mutual Funds for Dummies is also a great book on this topic.

 

         

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