A Mutual Fund is an investment vehicle, managed by a professional investment manager, with pooled money from multiple investors, with shares representing each investors respective stakes. They currently provide exposure to stocks, bonds, commodities and other assets. For a simplified explanation, please read on.
Imagine a diverse group of would-be investors, who've all recently heard of the benefits of investing.
They all spend some time reading / researching and generally trying to figure out the best way to invest in the stock market.
They could each purchase a few stocks on their own and build up a portfolio over time, but in order to benefit from diversification (which they've heard is a good idea), they wonder how they'll find the time or resources to manage a portfolio of 50 or 100 stocks?
After chatting to one another, they decide to get together, pool all of their money and hire a professional investment manager to invest it for them.
The tricky bit is how to maintain clear records of ownership, so to keep track of who invested what, they decide to allocate “shares” to each investor representing each of their respective stakes in the total investment.
In order for investors to understand what their investments are worth every day, the Mutual Fund tallies up the value of everything it owns and divides it by the number of shares that exist.
Under this structure, investors know exactly what each share is worth and if they want to buy more shares, they know exactly the amount of cash to send the Mutual Fund for each share.
Similarly, if they want to sell shares, they know exactly how much cash to expect in return.
It’s an elegant system which has been around for many years.
ETF's or Exchange Traded Funds are the particular type of Mutual Fund that EasyEquities provides access to through the Tax-free Savings Account.