How mutual funds work

UTC FEATURE BOX

WHAT IS NAV?

Net asset value (NAV) is a term used to describe the value of an entity's assets less the value of its liabilities FUN FACT

Now that you understand more about mutual funds, I want us to go a step further.

Knowing the Basics

The key to understanding how mutual funds can work to improve your financial standing is by understanding how they operate.

Simply put you invest in a mutual fund by buying units. The number of units you buy is determined by the fund’s unit price or net asset value (NAV) and the amount you have to invest.

For e.g., if a fund’s unit price is $10.00 and you have $1,000.00 to invest, you’ll be able to buy 100 units assuming there’s no sales charges or transaction fee.

HOW DO I BECOME AN UNIT HOLDER?

By owning units of a fund, you become a unit holder.

A mutual fund pools money from many individual unitholders like yourself. The fund’s manager invests this money in a portfolio of stocks, bonds, T-bills or other securities, depending on the fund’s objectives.

Dividends & Capital Growth

Are the two ways unit holders can generate money from their investments.

Dividends

These are paid from earnings generated by the fund’s investments. These earnings may include dividends paid by issuers of security or in the form of interest generated by investment

Capital Gains Growth

This is earnings generated when an investment that has increased in value is sold.

There are two types of capital gains when investing in mutual funds: