How Do Mutual Funds Work?
- The Mutual Fund Company accumulates money from individuals for the purpose of investing.
- The Fund Manager invests the accumulated money from the investors in stocks, bonds and various other financial instruments depending on the type of mutual fund.
- These funds then generate returns which can either be positive or negative depending upon the market condition of the security.
- Positive returns add value to the principle whereas negative returns erode the value of the Fund.
- The generated returns then are distributed to the investors in two ways-
A)Growth Option- In this option, the money is invested back into the fund to enjoy the benefits of compounding.
B)Dividend Option- In this option, the investor gets returns in the form of periodic payments.