What are mutual funds?

Mutual funds are a collective investment instrument that pools money from various investors to invest in various financial instruments like securities, real estate, and commodities.

By investing in a fund, the shareholders transfer the right to manage their money in accordance with the fund’s investment strategy. In return for the invested capital, the investor receives shares of the fund, that is, a part of the total portfolio. The value dynamics of the fund’s assets is directly reflected in the price of each share.

Are the shares of mutual funds securities?

Each share secures the owner’s right to a part of the fund’s assets, which makes the share a security. The investor can sell a share at its current value at any time. The acquisition and redemption of shares is handled by the management company. The price of a mutual fund share is calculated by taking the fund’s net asset value and dividing it by the total amount of shares outstanding. Each shareholder has equal rights and can profit from the shares’ redemption or from the fund’s effective asset management.

What are some types of mutual funds?

For the investor, the time when he or she can exchange fund shares for money is important. Therefore, mutual funds are classified as follows:

-          Open-end Funds

The fund shares can be purchased and redeemed on any day that is not a holiday.

-          Interval Funds

There are certain dates throughout the year when you can purchase or sell the fund shares.

-          Closed-end Funds

It is possible to become a shareholder only at the point of the fund’s creation, and you can realize a share only at the moment of its closing.

Open-end funds are often used to purchase liquid assets such as stocks and bonds. For less liquid assets, the interval and closed-end mutual funds are used, which increases the investor’s risks as well as the potential returns.

On a separate note, we should mention exchange-traded mutual funds. Shares of these funds can be purchased on the stock exchange if you have a brokerage account. This is an extremely convenient manner of ownership, as it allows you to buy or sell the asset right on your mobile phone without having to visit the management company in person.

What are some of the advantages of investing in mutual funds?

- Liquidity

The purchased fund shares can be sold on any day that is not a holiday.

- Low cost of ownership

If we compare independent trading and owning a part of a mutual fund, the costs of the latter will be lower, since the fund has better conditions as a large investor.

-Passive income

The management company handles asset distribution and is responsible for the results.

- Low minimum threshold

The initial investment doesn’t have to be a large amount.

- Diversification

Funds can distribute their assets widely, which is usually not available to small private investors.

In conclusion, we’d like to note that mutual funds are a good tool for both the stock market beginners as well as professionals. With mutual funds, you can build a long-term diversified portfolio that meets the individual req

uirements of the investor, even if his capital is very limited. The mutual fund shareholders’ rights are regulated by the Central Bank, which reduces the risk of fraud, while high liquidity allows the fund to quickly respond to changes in the stock market.