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Mutual Fund Definition: Day Trading Terminology

mutual fund

Mutual Fund Definition: Day Trading Terminology

A mutual fund an investment vehicle whereby funds are pooled together with the goal of investing into securities like stocks and bonds among others. A mutual fund is overseen by money managers or fund managers working for a money/asset management company. Money managers invest the funds with the goal of making capital gains as well as income for the investors.

One thing you need to know is that a mutual fund’s portfolio is usually structured. The reason for doing so is to ensure that the objectives of the investors and the investments are matched. As a professionally managed fund run by an asset management company, investors or buyers are allowed to purchase units or shares which can also be redeemed as required. This is usually done against the current net asset value per share.

This value is usually calculated by dividing the total value of securities found in the portfolio with the total amount of shares outstanding.

Mutual funds are considered to be the easiest investment vehicles. Furthermore, they are less stressful compared to others which have a higher risk. Today, many people are contributing into mutual funds with the goal of reaping profits/capital gains from investments made with the funds.

The goals of a fund manager usually depend with the type of fund especially when it comes to investing. For example fixed income fund managers will probably opt to invest in securities that provide the highest yield at a low risk.

Types of Mutual Funds

There are a few different types of mutual funds that you can choose to invest in so lets have closer look at the different options below.

Open End

According to savvy investors, open end mutual funds are the most common. Open end funds refer to those that have a set number of shares. This means that an investor purchasing shares/units will be issued with new shares against the current net asset value. These shares can be redeemed when the investor decides to sell them. One thing you need to know is that this type of mutual fund usually reflects the net asset value for underlying investments. This is because the units can be created and made invalid.

Close End

In this type of mutual fund, a set number of shares are issued via an IPO to the public. The shares are traded on the market which means they are subject to market forces – supply and demand. As a result, close end mutual funds trade at a discount to the net asset value.

Load vs. No load

Load is a mutual fund where a sales commission is remitted during the purchase of shares. For example, let’s assume investor A wants to purchase an X number of shares in a mutual fund. If he or she selects load, the investor will part with a sales commission. This value is exclusive of the net asset value of fund’s shares.

No load refers to mutual funds that return higher gains thanks to lower expenses. These are associated with ownership and don’t have a sales commission upfront.

Pros of Mutual Funds

  • Mutual funds are managed by professional fund managers who understand the in and outs of the fund.
  • Fund managers will monitor the investment vehicles under the fund portfolio thus ensuring peace of mind. This is because they are knowledgeable and able to analyze financial statements and calculate financial ratios as well.
  • Mutual funds are the easiest investment vehicles to invest in. Not only are they low risk but they do provide higher gains.

Final Thoughts

As said earlier, mutual funds are the easiest investment vehicles to invest in. They are managed by asset management companies who employ fund managers with the responsibility of analyzing financial statements, calculating financial ratios and selecting the best securities that guarantee higher capital gains. One thing you need to know is that you will remit an expense ratio, a fee charged when you purchase shares in a mutual fund.