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What is a mutual fund?

in partnership with Schroders Personal Wealth

A mutual fund is a type of investment in which your money is pooled together with that of other shareholders. This gives you the benefit of owning shares in a collection of investments you may not have been able to afford as an individual.

Mutual funds are overseen by a fund manager, who will invest in various stocks, bonds and assets on your behalf.

This type of investment is seen as less risky than a single investment, as you’re splitting your money into different assets. You’ll also benefit from the guidance of a financial expert, who’ll make decisions based on their experience and market research.

The value of investments, and the income from them, can fall as well as rise. Therefore, they’re not guaranteed. The investor might not always get back their initial investment.

How do mutual funds work?

You’ll pay money to a fund management company, which will make investments on your behalf across various assets to build up your portfolio. If these investments perform well, you’ll see a return in either dividends, capital or shares.

Types of mutual fund

A mutual fund company will spread your money across a variety of investments depending on the risk level and financial goals you set. This includes:
  • Stocks – You’ll own a share in a company. If these shares rise, your fund manager can sell them for profit. Some stocks also pay dividends.
  • Bonds – A fixed-income investment where any returns are received through interest. These can be long or short-term assets.
  • Money market funds – A relatively low-risk, short-term investment which usually pays out as dividends. These securities don’t typically yield high profits.
  • Balanced funds – A mixture of the assets mentioned above. Offer a variety of low and medium-risk investments to balance the overall risks. 

What are types of return?

There are typically three ways you could see a return on your mutual funds:
  • Dividends/interest – If your shares or funds increase in dividends or interest, you will receive a portion of the profits. This can also be reinvested.
  • Capital – When your fund manager sells security which has risen in price, you’ll receive a capital gain. This is usually distributed monthly or annually.
  • Shares (NAV) – Instead of selling a share for a profit, your fund manager may hold off selling it in the hope it will rise further. This is calculated through a net asset value (NAV) per share.

Mutual funds: FAQs

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