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The Basics of Mutual Fund Investing

Wednesday, 08 Sep 2010 10:53 AM

Mutual fund companies can make investing easy for you. Most mutual funds offer two types of investment schemes. They are:
* Closed-ended schemes that offer a limited number of shares, or *Open-ended schemes that offer any number of shares.
Where do mutual funds invest?
Mutual funds invest in stocks, bonds, and cash, including money market instruments such as call money, treasury bills, certificates of deposit, reverse repos, and commercial paper as well as regular bank deposits.
Growth mutual funds invest in rapidly growing businesses. These are businesses growing at an average rate of at least 10%. The primary objective of growth mutual funds is to provide capital appreciation.
Money market mutual funds invest in money market instruments. This assures that the investment is safe, but the dividends are modest.
Stock mutual funds invest primarily in stocks. While these are riskier, they are popular since they can generate higher returns on investment.
Bond mutual funds invest in bonds and other debt securities. Bond mutual funds seek to protect the investment, and pay out regular income. Bond mutual funds are preferred by investors who want a safe sum of money at monthly intervals without taking much risk of market volatility.
Dividend mutual funds primarily invest in preferred shares or common shares that generate a higher return. Dividend mutual funds seek to maximize dividend income and the resulting dividend tax credit.
What is NAV?
Net asset value or NAV is a measure of the scheme’s performance. It is the actual value of a share / unit on any given business day. If the NAV is more than the face value of the share / unit, the investor’s money has grown. If the NAV is less than the value of the share / unit, the investment has eroded.
How do mutual fund companies make money?
Mutual fund companies seek to attain the best possible price while buying or selling stock on behalf of their investors. To maximize returns for investors, mutual funds try to minimize commission outflow to brokers through proper brokerage arrangements.

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