1. What is a mutual fund?
A mutual fund is an investment vehicle whereby a pool of money from a number of investors is invested with the assistance of professionals in various stocks, bonds, or other securities.
2. How do mutual funds work?
Investors purchase shares in a mutual fund, and the value of those shares changes according to the performance of the investments made by the fund. Fund managers determine how to invest the money in line with the goal of the fund.
3. What are the types of mutual funds?
Common ones are:
Equity Funds (stocks)
Bond Funds
Money Market Funds
Index Funds
Balanced Funds (stocks and bonds mix)
Target-Date Funds (age-based retirement funds)
4. What is a difference between active and passive money management?
Fund managers are specialists who make trades to buy securities or sell, which is why it is classified as an active money management.
Passive investment is an open-ended fund not actively managed.
For example: Index funds can track the indexes and require low management.
5. How can I select which mutual fund suits me?
Choose a mutual fund based on your investment goals, risk tolerance, time horizon, and fees. Consider whether you want to invest in stocks, bonds, or a mixture of both, and research the fund’s past performance.
6. What are the fees associated with mutual funds?
Fees can include:
Expense ratio (annual management fees)
Sales load (commission fee)
12b-1 fees (marketing and distribution fees)
Look for funds with low fees, as they can eat into your returns over time.
7. How are mutual fund returns calculated?
Mutual fund returns are based on the change in net asset value (NAV), which is the per-share value of the fund. Returns are calculated by the change in NAV plus any dividends or interest paid.
8. Can I lose money in a mutual fund?
Yes, mutual funds can lose value depending on the performance of the underlying assets. Market downturns or poor management can lead to losses, although diversification typically lowers risk.
9. What is diversification in mutual funds?
Diversification is the practice of spreading investments across different securities to reduce risk. Mutual funds achieve this by investing in a wide range of stocks, bonds, or other assets within the fund.
10. What is the minimum investment for a mutual fund?
The minimum investment varies by fund but generally ranges from $500 to $3,000 for initial investments. Some funds may have lower minimums for retirement accounts or automatic investment plans.
11. How are mutual funds taxed?
Mutual funds are taxed on dividends, interest income, and capital gains. You would be responsible for paying capital gains taxes if you sell shares at a profit. Taxes vary with taxable or tax-advantaged accounts.
12. What is an expense ratio?
The expense ratio is the share of the assets in the fund spent on the operational costs of management and administration. A low expense ratio leads to higher net returns for the investors.
13. Can I purchase mutual funds through a broker or online service?
Yes, you can purchase mutual funds through a brokerage firm, financial advisor, or an online investment platform. Some websites provide no-load mutual funds that do not carry any sales commissions.
14. What are no-load mutual funds?
No-load mutual funds do not charge a sales commission (or load) when you purchase or sell shares. These funds may have lower upfront fees, though, but can then have other types of management fees.
15. How do mutual funds distribute returns?
Mutual funds distribute returns in dividends (equities or bonds) and capital gains distributions, which are profits on the sale of securities. You can choose to reinvest such returns or take them in cash.
16. Can I invest in mutual funds for retirement?
Yes, because of their diversification and professional management, mutual funds are a popular choice for retirement savings accounts such as 401(k)s and IRAs.
17. How to redeem mutual fund shares?
You have to contact the company where you invested your funds or your brokerage firm to redeem your mutual fund shares. The fund will sell your shares at the current NAV and send the proceeds.
18. Risks involved in mutual funds:
The risks involved are market risk (moving stock prices), interest rate risk (for bond funds), and management risk (bad fund management). Diversification helps in mitigating some risks, but no one is guaranteed returns.
19. How often can I buy or sell mutual fund shares?
Mutual fund shares can be bought or sold usually once per day, according to the NAV at the end of the trading day. Unlike stocks, they cannot be traded during the day.
20. How do I monitor my mutual fund’s performance?
You can monitor performance by checking your fund’s NAV, reviewing periodic statements, and comparing returns to benchmarks or other similar funds. Many mutual fund companies provide online portals to track performance.
