Mutual Funds or Equity funds are the type of investment programs that are funded by multiple investors or shareholders and the funds are used to manage or maintain a diversified investment portfolio. The funds are managed by the Asset management company, who invest their money in different trades which yields higher returns including equity stocks, bonds and any other securities. Through investment in mutual funds, an investor can have easy access to a professionally managed portfolio targeted to create value for its investors.
From an investor point of view Mutual funds is a great opportunity to invest in a long term in order to earn higher profits. It is a great opportunity to earn higher profits as people from different walks of life can come up with huge capital and invest in the funds. Mutual funds don’t play with the investor personal profile restriction, as it only caters the money and the fund manager manages the money on the behalf of the investor.
Speaking of a fund manager, he is the person who invests the capital in diverse portfolios and making sure the risk undertaken in the trade is balanced by the other transaction so that overall risk can be maintained at the lowest possible level. The gain realized under the head of the mutual funds will be shared by all the investors in the proportion of their amount invested in it.
Additional Reading: What You Need to Know about Mutual Funds When Investing in Pakistan
Types of Mutual Funds by Structure
There are two types of mutual funds by structure. One is open ended mutual fund and the other is close ended mutual fund. Let’s have a look on these two mutual funds in detail.
1- Open End Mutual Fund
Open end mutual funds are those funds in which you can invest and redeem the funds whenever you like. Investment and redemption is very easy, as you only have to contact the Asset Management Company. That company will buy the funds from you at the Net Asset Value (NAV). NAV represents the per unit price of a mutal fund. The value will be given of that very business day on which you are selling by checking the price from the market at that very business day.
2- Close End Mutual Fund
As the name says, Close end mutual funds are those funds which are offered to the public only once and created through an Initial Public Offering(IPO). These shares are then listed on the stock exchange for the sake of trading. Investors who invest in such kind of funds, can sale their shares in the stock exchange market only and through the broker. They cannot sale back to the funds management company. When it comes to the valuation of the close ended funds, it should be taken into account that these stocks are sold either on the amount greater then the NAV or lesser then NAV. This means that close ended funds are sold either on premium or on discount from the NAV.
Additioanl Reading: What is the Risk of Investing in Mutual Funds
How Does a Mutual Fund Work?
It is necessary to understand that how a mutual fund work, if you want to invest in this long-term investment plan.
Investors pool their money with the Fund Managers (Asset Management companies), who then invests in diversified portfolio of securuties, bonds or any other instruments in order to generate high returns for their investors.
Each mutual fund scheme aims for a particular type of investment while collecting the money from the investors. Each investor is allotted a specific unit depending upon the present NAV of the fund.
The value of each unit of the fund is calculated depending upon the current market price of all the assets held by that fund. As highlighted in the above sections, this price is called the Net Asset Value of that fund. The total assets held by the mutual fund is called Asset Under Management (AUM).
Asset under management is equal to the pooled funds whose values will be increased or decreased with the market fluctuations and these can be shown in the profit and losses of these funds.
In a nutshell, mutual funds are a great opportunity for those investors who want to invest in the long-term funds and also who are new to investing . At Mawazna.com we help our potential investors to do a little home work before jumping into the mutual funds and here we are by their side to help them in making an informed decision. Mawazna.com aims to create good awareness so that a highly sophisticated investors community can be created actively participating in the national markets.
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