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What Are Mutual Funds?

Basically, a mutual fund is a collection of stocks and/or bonds.

You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities.

Each investor owns shares, which represent a portion of the holdings of the fund.

Generally, you can use dividends paid to purchase additional shares in the fund or choose to have them distributed to you as income.

Mutual funds can enable you to earn the higher long term returns of holding stocks without having to worry about picking the right stocks, since a professional money manager does that for you!

You Earn Money from a Mutual Fund in Three Ways:

  1. Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
  2. If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
  3. If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Advantages of Mutual Funds:

Disadvantages of Mutual Funds: