Mutual Fund Explained

Mutual Funds

Mutual Funds are a collection or a pool of funds generated by investments of individuals and corporates. This pool is then invested in different avenues like stocks, money-markets, bonds, Sukuks , TDRs , securities and any avenue of investment. 

The pool of funds is managed by expert fund managers who take decisions on investing these funds in different avenues to achieve better rates of return. The return is then distributed amongst the pool members and fee of managing the pool is charged, which is usually nominal and is adjusted in net asset value of the fund, by the asset management company.There are two classification of Mutual fund Open ended fund and Close ended fund.

Open ended Vs Close Ended Mutual fund 

Open ended fund are those in which you can invest and disinvest on your convenience and choice.There are no binding or tenure of investment set on your investment. A net asset value (NAV) is announced every day.

Close ended funds are those funds in which you invest once they are offering there IPO or initial public offering .The fund is then listed and traded like a stock on a stock market.

Why Mutual Funds

Question arises why should we invest in mutual fund rather then investing our funds our selves in different avenues. The main reasons why you should invest in Mutual fund is that :

1. Your fund is managed by professionals who are good at what they do.
2. Your investment is diversified in different avenues which reduces the risk of volatility and exposure to single investment portfolio , and it generate better returns for you because of its diversification.
3. In Pakistan if you invest in mutual funds you can claim a tax rebate on your taxable income.
4. Mutual Funds generate better returns then bank deposits, and other investment portfolios.

General Misconceptions

There is general misconception in the public at large that  Mutual funds are only relate to stock exchange , which is not true. As described earlier there are many avenues of investment in mutual fund and stock market is one of them . Following are the types of Mutual funds :

1. Money Market Funds
2. Income Funds
3. Balanced Funds 
4. Index Funds or Equity Funds
5. Islamic Funds
6. Bonds Fund  
7. Specialized Funds

There can be many classifications of the funds as per the investment mode.