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What is mutual fund

A mutual fund is a company that pools money from many investors and invests that money IN various places viz. in stocks, bonds, short-term money-market instruments, other securities or assets. It can also be a combination of any of these investments. The portfolio of any mutual fund is actually the combined holdings it owns. Each share or unit of the mutual fund stands for proportionate ownership of any investor in the mutual fund holding and the income those holdings generates. There are certain terminologies of the mutual fund which one needs to know to get a fair idea before investing in these instruments.

What is NAV
This is the underlying value of a unit of mutual fund. It is calculated as the market value of its assets by subtracting its liabilities and then dividing by the number of units issued by the mutual fund. It is basically the total value of the portfolio of the fund less its liabilities. The NAV is normally calculated on a daily basis. The NAV is by and large below the market price because the current value of the fund’s assets is higher than the historical financial statements which are normally used for calculating the NAV.

Features of Mutual Funds:
Some of distinctive characteristics of mutual funds include the following:

  • Investors purchase mutual fund shares from the fund itself (or through a broker) instead of from other investors in a secondary market (in Stock Exchange)
  • The mutual funds shares are purchased at per share net asset value (NAV) of the fund. Apart from that price an investor may have to pay any fees that the fund imposes at the time of purchase in the form of specified entry loads.
  • Mutual fund shares are “redeemable,” means one can sell one’s shares back to the fund or to a broker for the fund.
  • Mostly Mutual funds are constantly creating and selling new shares to attract and accommodate new investors.

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