Many people have misconception that mutual fund is like a share or stock of a company where you invest to make profit. To get a clarity let us understand what is mutual fund and how to make money out of a mutual fund.
Mutual fund is a company that has set some portfolio of stocks, bonds and other securities of different companies traded in stock market or available in market for trade. These portfolios are managed by fund managers who are specifically assigned with an objective to manage and monitor the performance of portfolio.
So, a mutual fund is an intermediary that brings group of investors together and invest their money in stock, bonds and other securities.
To invest money into these portfolios, these companies are collecting money from many investors across the world. In return, investors own shares of the mutual fund in proportion to the amount paid. Price that you pay while investing into these funds is the fund’s per share net asset value plus any fee that is imposed by the funds.
Income from a mutual fund
After investing, your money will be invested and reinvested in the portfolio that you have chosen. There are 3 ways to get money from your mutual fund investments;
- Out of the fund’s income, a portion will be shared with the investors as dividend. These incomes are generally obtained as year end dividend from companies where mutual fund has investment.
- If you have decided to sell mutual funds then the net asset price on the selling date minus the net asset value on the purchase date will be treated as capital appreciation profit.
- If your mutual fund has some capital appreciation by selling shares then that profit will be shared with you at the year end in proportion to your share holding.
These companies will also give you option of taking out the profit or reinvest in their mutual funds. The option will be yours. If you do not want to take risk of share market or do not have knowledge of share market then it’s a good idea to get into stocks or shares through a mutual fund.