A mutual fund is a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities such as stocks, bonds, or other assets. These funds are managed by professional fund managers who make investment decisions on behalf of the investors.
Here is how a mutual fund works:
- Pooling of Funds: When you invest in a mutual fund, your money is combined with the contributions of other investors, creating a larger pool of capital.
- Diversification: The fund manager uses this pooled money to buy a mix of different assets, which helps spread the risk. Diversification reduces the impact of individual security performance on the overall fund.
- Professional Management: The mutual fund is managed by experienced professionals who conduct research and analysis to make informed investment decisions. Their goal is to achieve the funds objectives, such as capital appreciation, income generation, or a combination of both.
- Unit Ownership: When you invest in a mutual fund, you are issued units or shares proportional to the amount you invested. The number of units you hold determines your ownership in the fund.
- Net Asset Value (NAV): The NAV is the price per unit of the mutual fund and is calculated daily based on the market value of the funds assets minus its liabilities. The NAV fluctuates based on the performance of the underlying assets.
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