How Does A Mutual Fund Work?

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A fund (also known as unit trust or mutual fund) pools money from many investors. It is then invested in a wide range of asset classes including equities, fixed income, money markets, and alternative investments depending on the fund’s mandate.

The combined holdings of the fund are known as its portfolio. When you invest in these funds, you are buying shares in the funds. Each share represents an investor’s part ownership in the fund. The percentage (unit) of ownerships then translates to the income it generates for the investor.

What type of income do these funds generate?

investing in unit trusts also means your funds are pooled together with other investors who have also bought units. Hence, any gains will be distributed among all the investors according to your investment amount. This is known as income distribution, which can be made up of shares, capital gains, dividends and profit depending on your fund type.

Investors can benefit from the following income when they invest in these funds.

Dividend payments– income earned from dividends on stock or interest on bonds. The fund then pays the shareholders the income based on their investment unit percentage after deducting expenses.
Capital gains – The price of the fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. The fund can distributes these capital gain, after deducting any capital losses to investors at year end.
Net Asset Value (NAV) increase – .When the market value of a fund’s portfolio increases, the value of the fund and its shares increases. The translates to your investment unit having higher value.

Who can invest in these funds?

Investors with savings to invest, but prefer a passive participation. These types of funds are suitable for those who do not have the time or interest to hold portfolios of direct investments or shares. Or, they prefer to put their money in a secure, reputable investment vehicle which suits their purposes.

These types of funds also allow investors to have access to a wide range of investments not normally available to them as individual retail investors.