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A few times a year, whether in the financial press or from clients and prospective clients, we encounter comments about mutual funds that contain misconceptions.
There are three more-frequent misconceptions that I would like to clear up and purge from investors’ memories. To establish a foundation, it’s essential to understand that a mutual fund, at its core, is a “wrapper,” or an investment structure that allows many individual investors….Continue reading….
By:
Source: Kiplinger
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Critics:
In the UK, the equivalent type of fund is called an ‘open-ended investment company’ or OEIC. But almost everyone calls them mutual funds anyway, so that’s the term we’ll use. (To be very thorough, there are also similar funds in the UK called unit trusts. A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.
The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Mutual funds let you pool your money with other investors to “mutually” buy stocks, bonds, and other investments. They’re run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them. You get exposure to all the investments in the fund and any income they generate.
Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers. How do mutual fund distributions work? Distributions may be in the form of capital gains, interest income, or foreign source income or “taxable dividends”.
Because mutual funds invest in a variety of different assets, income can be earned from dividends on stocks and interest on bonds held within the fund’s portfolio. Although there are mutual funds with no minimums, most retail mutual funds do require a minimum initial investment of between $500 to $5,000, with institutional class funds and hedge funds requiring minimums of at least $1 million or more.
One of the prominent reasons for mutual fund loss is a need for more knowledge about the investment options and market. Individuals who invest in mutual funds without proper research often end up in a situation where they have to face a loss of money. Vanguard has both index mutual funds and actively managed funds. The strategy of investing in multiple asset classes and among many securities in an attempt to lower overall investment risk.
These investment products hold hundreds to thousands of stocks, bonds, and more. Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circumstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees. To withdraw money from mutual funds, you can either complete and submit a withdrawal request form for offline processing, which your broker will forward to the Asset Management Company (AMC), or you can redeem your funds online.
Becoming wealthy through investing in mutual funds involves a disciplined approach and a long-term perspective. It would be best to consider investing in mutual funds when you have long-term financial goals and are looking for a diversified investment option that matches your risk tolerance. The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund’s portfolio will have to lose their entire value.
However, the returns from a fund can go to zero or even become negative. If you own stocks through mutual funds or ETFs (exchange-traded funds), the company will pay the dividend to the fund, and it will then be passed on to you through a fund dividend. Because dividends are taxable, if you buy shares of a stock or a fund right before a dividend is paid, you may end up a little worse off.
Are mutual funds safe? All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks. Mutual fund liquidations, also referred to as “full closures,” are never good news. Liquidation involves the sale of all of a fund’s assets and the distribution of the proceeds to the fund shareholders.
At best, it means shareholders are forced to sell at a time, not of their choosing. Like income from the sale of any other investment, if you have owned the mutual fund shares for a year or more, any profit or loss generated by the sale of those shares is taxed as long-term capital gains. Otherwise, it is considered ordinary income. However, during a market crash, stock prices come down.
This, in turn, pulls down the performance of mutual funds holding these stocks. Companies, too, face a tough time with their operations taking a hit, and it takes time for stocks to recover. In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.
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