So far we discussed Equity Market, it’s time to understand how the mutual fund trades. Why it’s less risky? Is it a better option than a stock market?
What is Mutual Fund?
Myth: Mutual fund is a company.
A mutual fund is a trust, not a company, which includes sponsors, trustees, asset management companies (AMC), and Custodians. The MF gives an individual investor access to diversified professionally managed portfolios at a low price. Unlike stocks, a Mutual fund does not give the holder any voting rights.
AMC Pools money from many investors or the public to invest in securities like stocks, bonds, Money market, and other assets. This diversification reduces risk (High risky-high returns) on Investment.
How Mutual Funds are Traded
Mutual Funds trade Different from ETFs and stocks. Although there are MF with no minimum, most retail MF requires a minimum of $500 or more. Unlike ETFs and Stocks, it trades only once a day after the market close.
When you buy or redeem MF, you are directly transacting with the fund whereas, with ETFs and Stocks, you are trading in the secondary market. The price of a share of MF is decided by NAV (net-present Value) which is calculated after the markets closed. MF gets a settlement period from 1 to 2 business days.
Some MF charges sales load while buying or redeeming MF Shares as well as short term redemption fees and other transaction fees.
While accessing MF, it is essential for investors to consider annual tax liability for the income generated from MF. Any dividend payment funds will increase an investor’s taxable income for the year. An Investor should choose those funds which focus more on long-term capital gains and avoid dividend stocks or interest-bearing Corporate bonds.
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”Benjamin Graham