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What is a mutual fund and how to invest in it

31.10.2018

These types of events can help generate income for the fund, which by law must be paid out to investors in the form of periodic distributions. For the most part, investors who own shares in the mutual fund at the time these distributions are made are responsible for the taxes on that money.

However, the income from funds that invest in municipal bonds may be exempt from federal, and in some cases, state taxes. Investors who own mutual funds that are not held within an IRA or another tax-advantaged account may be subject to three different types of taxes: Dividend income, which is generally taxed at your ordinary income tax rate Capital gains from the sale of securities, which can be taxed at your ordinary income tax rate or the more favorable long-term capital gains rate, depending on how long the securities were held by the fund Capital gains when you sell or exchange shares of the fund at a profit; those capital gains could also be taxed at your ordinary income tax rate or the more favorable long-term capital gains rate, depending on how long you held those shares Fees There are a variety of fees that may be associated with mutual funds.

Some funds come with transaction charges for buys and sells or commissions known as loads. And there are funds that charge a redemption fee if you sell shares you’ve only owned for a short time.

Investors also pay ongoing expenses to cover the cost of operating the fund; this includes investment advisory fees paying the fund manager and the research staffas well as transaction costs associated with buying and selling securities within the fund. When evaluating a fund, remember that fees play a factor and may potentially detract from a fund’s performance over time. All Fidelity funds can be bought or sold with no transaction fees when you buy them through Fidelity.

Close-ended schemes – In this type of scheme, the unit capital is fixed and only a specific number of units can be sold. The units in a close-ended scheme cannot be bought by the investor after the New Fund Offer NFO has passed which means they cannot exit the scheme before the end of the term.

Sharma is investing in Mutual Funds to get more from his money. What are YOU doing? This is calculated after every business day by the AMC.

AMCs will charge you an administration fee, which covers their salaries, brokerage, advertising and other administrative expenses. This is usually measured using an expense ratio. The lower the expense ratio, the lower the cost of investing in that Mutual Fund. AMCs may also charge loads, which are basically sales charges incurred by the company in the form of distribution costs.

If you are unfamiliar with associated charges, you might get into a position where the profits from your investment are reduced considerably due to overhead expenses.

How to invest in Mutual Funds in Detail Before you decide to invest in a mutual fund, it is important to keep the below points in mind. Doing so will help you choose the right kind of funds to invest in, and help you accumulate wealth over time. Identify your purpose for investing – This is the first step towards investing in a mutual fund.

If you do not have a specific goal, you should at least have a clarity on how much wealth you wish to accumulate and in how much time. Identifying an investment objective helps the investor zero in on the investment options based on level of risk, payment method, lock-in period, etc.

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