Mutual funds are like a pool of funds gathered by different small investors that have simalar investment perspective about returns on their investments. These funds are managed by professional investment managers who act smartly on behalf of the individual investors and invest in securities like stocks, bonds and other commodities. Each participant in the mutual fund is given a shareholding as per the number of shares aquired by the investor. Each investors holding is equal to the shares held by the investor divided by the total number of shares issued by the fund.
The funds are invested into the market in the weights of securities as given by the mutual funds prospectus. If the fund generates profits the profits are then distributed to the shareholders of the fund in the proportion they hold shares in the fund.
The sale and purchase of mutual funds shares takes place directly with the Mutual fund company itself in case of open ended mutual funds. The new shares are issued to new investors and there is no limit for issuing new shares. The holding of the existing shareholders is not affected by the new entrants as the position of investors is marked to market on dailiy basis.
To learn more about mutual funds see this video.
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