What are mutual funds and how to make money on them
If you have a certain amount of money, and you want to increase it, the question arises, where to invest these funds? Deposit rates do not suit everyone, and in order to work with securities, you need to learn, which is not always the time and desire. Beginners can be advised to use tools with minimal risks and invest in mutual funds.
Mutual fund – what is it?
A mutual fund is a tool for investors that combines the money of different depositors. These funds are used to form one common investment portfolio for all. Each investor receives a share in the portfolio for their money – a share. Its size directly depends on how much money was invested.
If the mutual fund functions well and acquires reliable securities, then the shares of its participants significantly increase in price. Accordingly, any investor can sell his share at a price higher than what he bought, and make a profit. By itself, the share can not make a profit, it does not accrue interest. You can earn money only on the difference between the price of its purchase and the price of its sale. UNITS are assets, their price is made up of the value of the shares included in it.
Different parties are involved in the activities of the investment fund. An investor is someone who gives their own money to the fund and receives certain units for it. The Management Company manages all the fund’s finances, making decisions about where to invest the money. For this, the Criminal Code charges a certain percentage, the amount of which is formed from the rules of a particular fund.
When a management company buys profitable assets, the fund’s investment portfolio increases in value, and accordingly, it receives good interest. Therefore, it is profitable for a fund management company to purchase only efficient and high-quality securities. The Criminal Code operates under a license and is controlled by the Central Bank of the Russian Federation.
In addition, there are agents, companies through which you can buy shares. Such agents are usually banks. Registrars, auditors, and brokers also participate in investment activities using mutual funds.
Which mutual fund is best to invest in?
At the moment, there are different classifications of mutual funds on the market, they are distinguished by the terms of purchase and sale of units.
An open-ended fund is considered the most comfortable option for an ordinary investor when investing in mutual funds. It does not limit the terms of transactions, the investor can sell or purchase a share when it is convenient for him.
Managers of such funds place funds in the most liquid assets, as units are often bought and sold. The terms in which the sale or purchase can be made are specified in the agreement, and the fund’s participants must first sign it.
An interval mutual fund is a fund where the sale and purchase of shares is possible only at a strictly defined time, it is prescribed in the fund’s rules of operation.
In addition, mutual funds are distinguished by the risks on:
- conservative, they usually consist of bonds;
- risky, the portfolio includes only stocks;
- mixed ones can contain different assets.
Mutual funds. How to make money?
To invest your money in a mutual fund, you need to transfer it through a broker, agent, or bring it in person. All data is stored in a special depository, all processes are controlled by the Central Bank.
Your income is the difference between the purchase price of a share and the sale price, and you must also take into account mandatory additional expenses. When buying or selling a share, you will have to pay a commission, the amount of which is regulated by the Criminal Code or the broker. This commission is not part of the share price.
Also, a commission is paid every year for professional management of your portfolio, which is included in the share price. The amount of commissions included in the share price is fixed in the basic rules of the organization.
In addition, you will have to pay taxes. If you have been the owner of the unit for less than 3 years, you will pay personal income tax. In this article, we talked about interesting tactics and strategies for earning money on mutual funds.
Investment in mutual funds. Advantages and disadvantages
Among the main advantages are:
- your assets are managed by professionals with relevant education and experience.The Management Company is interested in having only highly qualified specialists on its staff, since its profit depends on a well-formed investment portfolio;
- you are the owner of securities of various companies.The Management Company acquires assets of several enterprises from different economic sectors, thereby reducing possible risks.If one share falls in value, the loss will cover the asset of the other company;
- you will not need to make large investments in mutual funds.Such funds have a low entry threshold, and you can become an investor with only 1,000 rubles.;
- the fund’s activities are controlled by the Central Bank.If the management Company fails to do its job, it may lose its license.In this case, the mutual fund is transferred to another management Company, all assets will be sold, and depositors will receive their money back;
- Mutual funds have a higher yield than deposits.
But at the same time, you need to understand the disadvantages of investing in mutual funds:
- income in this case is not guaranteed.A management company can work for many years at a profit, but the next year it will work at a loss;
- you must pay a commission fee;
- the state will not insure your deposits.
If you decide to invest your own money in a mutual fund, consider the following recommendations::
- choose a mutual fund that suits you best.The fund can be open, interval, or closed.Differences – terms of sale and purchase of shares.In addition, the fund can be mixed, work only with stocks or only with bonds;
- pay attention to the percentage of expected returns.The higher it is, the greater the probability of risks;
- keep in mind that all data on profitability is compiled on the basis of forecasts, no one can guarantee you anything;
- you will need to pay two types of commission fees, one of them is included in the share price, the other is not.
It is a mistake to analyze the yield of a mutual fund only for one year, the management company may just be lucky. The ideal option is to check the fund’s profitability over 3-5 years. The greater the distance, the more objective the final result will be.