What is a mutual fund?
A mutual fund is a type of investment that pools your money with different investors to purchase stocks, bonds, and other securities. Professionals manage the funds to analyze market conditions and make investment decisions based on your previously discussed strategy.
How can I make money from a mutual fund?
You can earn money from your investment in three ways:
1. A fund may receive income in the form of dividends and interest on the securities it owns.
A fund will pay its shareholders nearly all of the income it has earned in the form of dividends.
2. The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.
3. If a fund does not sell but holds on to securities that have increased in price, the value of its shares (NAV) increases. The higher NAV reflects the higher value of your investment. If you sell your shares, you make a profit (this also is a capital gain).
Usually funds will give you a choice of how you want your earning handled: the fund can send you payment for distributions and dividends, or you can have them reinvested in the fund to buy more shares, often without paying an additional sales load.