Mutual Funds Explained

Mutual funds are professionally managed investment solutions. In this video, we give an overview of what a mutual fund is, how it works, and we define key terms.

A mutual fund is the most common type of open fund investment it’s considered open because units of the fund are created or removed as needed we’ll explain this a little more later on in the video when the fund is created the fund company also creates a document called the prospectus this outlines the fund’s investment objectives strategies minimums fees

Fund manager and more it essentially provides you with the information you should know about the fund before buying it the investment objectives and strategies give the fund manager direction as to which investment choices they should make think of the fund manager like a baker who’s told to make a chocolate chip cookie they can be creative and decide which

Ingredients to use and how much of each to make what they think will be the best cookie given the guidelines in terms of investing different companies can issue mutual funds that have the same goal but each would likely be made up of different investments this can lead to a difference in the fees and overall performance as investors we can compare mutual funds

That have the same or similar goals and then determine which one is right for us some mutual funds have an investment goal that seeks to follow the performance of a specific market index these are known as index funds and index is a fictitious portfolio of securities created to measure the value of a specific market or segment of it we’ll cover index funds in

More detail in another lesson when you buy units of a mutual fund you become an owner of the fund itself not the individual assets that the fund invests in think of it this way when you look at the holdings in your account you only see the mutual fund symbol not everything the mutual fund invests in the value of each unit is known as the net asset value per

Unit or navpu the navpu is calculated by taking the net value of all securities in the fund and then dividing that value by the number of units it’s usually calculated once a day based on the closing prices of the investments in the fund however some mutual funds may calculate their navpu less often this information can be found in the fund prospectus mutual

Funds don’t trade on an exchange like stocks instead units are bought from or sold to the mutual fund company directly at the price equal to the navpu the issuing company will create or redeem units depending on all the orders they receive for that day it’s important to note that mutual fund orders are usually required to be placed well before the closing of the

Markets this means that when you place an order to buy or sell a mutual fund you won’t know the exact price you’ll receive until the navpu is determined so what are the costs involved with investing in a mutual fund as with all investment funds the annual cost to run the funder expresses a percentage of the total value of the fund this is called the management

Expense ratio or mer the mer is not directly paid out of your pocket but it is paid out of the fund’s assets this decreases the nav of the fund which in turn lowers the value of each unit you own most mutual fund companies don’t charge you a transaction fee to buy their funds however most companies charge a fee of 2 or more if the fund is sold within a short

Period of time such as within 30 days of buying the fund brokers may also charge an additional short-term redemption fee the amount of fees charged and the length of short-term redemption period may vary so be sure to review the fund prospectus and your broker’s fee structure before placing a trade sometimes a fun company will offer different classes of the

Same mutual fund each class has a unique symbol for trading but contains the same investments the classes can differ when it comes to mers transaction costs minimum amounts for investing and some may be restricted to a specific type of investor a mutual fund may make periodic distributions to its shareholders a distribution can include the dividends interest

And capital gains the fund’s investment generated for a given period many mutual funds offer distribution reinvestment plans or drips by enrolling in a drip you can reinvest distributions you receive back into the mutual fund at no cost it means you can buy more units without having to pay transaction fees another way you can buy additional units of a mutual

Fund on an ongoing basis is by taking advantage of a systematic investment plan or sip a sip lets you automate these purchases you can customize the sip to match your needs by deciding on the front end how much you want to invest and how often because a sip can result in many purchases it’s important to know what the transaction fees are to learn more about

Drip and sip with cd direct investing contact an investment representative while buying a mutual fund lets an investment manager make investment decisions for you you still need to decide which mutual fund to buy in the first place to learn how to make that decision for yourself watch our lesson on researching a mutual fund trade on web broker you

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Mutual Funds Explained By TD