How exactly does mutual funds work?
Hello, as a beginner investor how do you actually earn money from mutual funds? I heard that it’s not about compounding interest and that it’s about the NAV on the day you wish to withdraw the funds that will determine your profit?
You’re in luck: mutual funds are perfect for the novice investor. Mutual funds pool the asset of thousands of small investors. That way you can get your funds run by an expert and gain large diversity. Not sure who told you that it’s just about the daily NAV. If you’re a long term investor (several years), that isn’t very relevant.
I had a perception that it was like time deposit, that your initial investment will earn interest and interest is added up to your initial investment and it will compound over time only that the interest rates varies every time. This is not the case in mutual funds right or is it?
Not true. The financial instrument that is like this is bonds. But a bond mutual fund is going to hold various type of bonds with varying interest rates. So the answer to this is probably no.
Note: I know what a mutual fund is at least it’s general idea that it’s composed of diversified investments managed by a fund manager. My question is how do you earn technically? Is it like compounding interest or not?
It utilizes compounded interest. Lets say you have $10k to invest and put it all into a mutual fund. You keep it in there for lets say a decade. Ideally when you decide to cash out your investment of 10k is higher.
Can someone enlighten me on this? Thanks.
No problem!