Mutual funds are partnerships for the joint receipt of income from invested funds. There are mutual funds almost everywhere, where you can earn not only through labor but through the placement of capital. On the internet, investment funds are made available from anywhere.
The essence of a client’s mutual fund earnings is simple:
- The client deposits money in an investment fund.
- The fund invests money in some type of income-generating assets.
- The investment profit is divided between the client and the fund managers.
But the structure and operations of mutual funds are complex and varied. It will not be possible to explain them briefly, therefore we will discuss the general concepts first.
What is the difference between an investment fund?
An investment fund is not a company, but an aggregate of property: money invested by investors and assets bought for this money.
An investment fund always has an administration or management company that carries out operations and is responsible for them.
An investment fund does not participate in the production, sale of goods, or services. You only buy and sell profitable assets. Such assets are usually securities: stocks, bonds, and financial liabilities, but they can be real estate, metals, and precious stones, or other financial instruments.
- Assets acquired by the investment fund do not become the property of the investors but remain the property of the fund.
- Investment funds issue their securities: shares, shares, units.
- The owner of a share in a mutual fund becomes the owner of a part of the common property but does not own any specific shares, bonds, gold bars, etc. that belong to the fund.
An investor can sell a share in the fund at its present value.
How do you earn money in mutual funds?
Mutual fund assets generate profits in two ways:
- Price increase over time, being able to sell above the purchase price;
- Some type of income that accumulates on assets, for example, interest on bonds and dividends on stocks.
The main assets in the basket of funds and the order of operations with it can be very different. Therefore, no one will say what the average performance of mutual funds is in general. It is only possible to collect statistical data on certain funds and fund groups from the past.
How are the funds earned by the mutual fund distributed?
All funds divide the income from operations in proportion to the shares of the clients, according to the number of shares. Only earnings are shared, not fund assets. The value of the underlying investment is returned when the investor sells the share in the mutual fund.
What are the benefits of mutual funds?
Mutual funds have special advantages over other investment options:
- A mutual fund combines significant amounts and therefore can acquire indivisible properties that are expensive.
- An investment fund can buy many different assets. The increase in the prices of some assets compensates for the fall in the value of others. This reduces the risks of the investor.
- The mutual fund has sufficient funds to hire highly qualified managers. This helps you earn more and also reduces risks.
- Mutual funds do not require investors to make personal decisions about transactions, which makes it convenient for investors without special knowledge and experience.
How are mutual funds organized?
The structure of a mutual fund depends largely on the details of its work. But there are some general rules:
- Investors (depositors, clients) contribute money to the Fund, but do not work in it and do not participate in active operations.
- Investment fund managers organize their structure and operation. Hire specialists in market operations.
- Investment professionals can be brokers and other professional asset traders.
- An investment fund may have specialists in the sale of its securities.
- The investment fund employs controllers, both internal and external.
Some positions sometimes combine the same people, but their rights and responsibilities do not change.
All of the above applies to all mutual funds. However, actual funds are rarely universal, but have their own details in terms of goals, assets, and work with clients.