There are many methods by which one mutual fund can make money. The sum total is seen in the yearly total percentage return.
The NAV increases and decreases everyday. When a mutual fund is bought or sold, the price obtained is the closing price at the market close of the day. The NAV will increase as the mutual fund purchased is more. If the investor has good funds, the NAV will increase in most years.
The capital gains and dividends are paid on profits from the mutual fund. These can be paid either quarterly or semi-annually or an annual basis. The payout dates must be known in advance. This prevents selling of a fund just before a major payout in the account. If done on a yearly basis, the profits made by selling stocks or bonds that have risen in price are considered. These profits are called capital gains. Capital gains distribution means the act of passing them out.
Compounded interest is the mode of payment of interest on mutual funds. The interest is paid on the previous principal and interest and not simply the principal. Thus, interest is obtained upon interest, again and again. This is the advantage of compound interest on simple interest.
This process is about making monthly payments in the mutual fund. While making monthly payments in the mutual fund, it is possible that the net asset value may be hit when it comes down. When it goes up, you can gain an increase in value. The dollar cost averaging in a mutual fund can leave the investor with a somewhat higher account value than that with one lump sum investment. Sometimes it may happen that dollar cost averaging would lead to a considerable raise in the mutual funds value.
The investment company has the responsibility of the management of the fund. So, it sells shares in the fund to individual investors. When a person invests in a mutual fund, he becomes a part owner of a large investment portfolio, along with the other shareholders in the fund. When one buys shares, the fund manager invests the funds along with the money invested by the other shareholders. Every day the fund manager has to follow this process – counting up the value of all the fund’s holdings, finding out how many shares have been purchased by the shareholders, calculation of the Net Asset Value of the mutual fund. The NAV is the price of a single share of the fund on a particular day. Those who want to purchase shares, ought to send the fund manager the money. Then the manager will issue shares for the investor at the most recent price. This procedure is repeated each day on a never-ending basis. So, mutual funds are also called as open end funds. If the fund manager is doing his job properly, the NAV of the funds would gradually become more – the shares would be worth more day by day.