NEPSE What ?

NEPSE Jargon: Mutual Fund

Published by Octron on May 24, 2009

A mutual fund is a corporation that pools large sums of money from individual investors who wish to save or make money. An individual or a team of professional money managers who invest the pool of money into stocks, bonds, or other securities run mutual funds. The combined holdings of a mutual fund are known as the fund’s portfolio. An individual who owns shares in a mutual fund does not have to worry about the investment portfolio. By investing in mutual fund, your money is spread out and diversified among a wide range of stocks, bonds, or other securities, minimizing risk. You need not to buy bonds and stocks directly. Furthermore, you are not limited to the volatile performance of merely one or two stocks. In addition to this, you pay minimal fees of your investment (per annum), while earning money with the expertise of the mutual fund managers.

Currently, the worldwide value of all mutual funds totals more than $26 trillion. [Wikipedia]

The Goal of Mutual Fund:
The goal of a mutual fund is to provide an efficient way for an individual to make money.

Why Mutual Funds:
Professional money managers manage mutual funds.
By owning shares in a mutual fund instead of buying individual stocks or bonds directly, your investment risk is spread out.
Because your mutual fund buys and sells large amounts of securities at a time, its costs are often lower than what you would pay on your own.

How Mutual Funds Works:
A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other securities. (The combined holdings of stocks, bonds or other securities and assets the fund owns are known as its portfolio). Each investor owns shares, which represent a part of these holdings.

Types of Mutual Funds

By Structure:
Open-ended Funds
Closed-ended Funds
Interval Funds

By Investment Objective:
Growth Funds
Income Funds
Balanced Funds
Money Market Funds

Risks

Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. A fund’s investment objective and its holdings are influential factors in determining how risky a fund is. Reading the prospectus will help you to understand the risk associated with that particular fund.

Generally speaking, risk and potential return are related. This is the risk/return trade-off. Higher risks are usually taken with the expectation of higher returns at the cost of increased volatility. While a fund with higher risk has the potential for higher return, it also has the greater potential for losses or negative returns. The school of thought when investing in mutual funds suggests that the longer your investment time horizon is the less affected you should be by short-term volatility. Therefore, the shorter your investment time horizon, the more concerned you should be with short-term volatility and higher risk.

Mutual Funds in Nepal

NCM Mutual Fund 2050
NCM Mutual Fund 2059

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