A mutual fund earns money when the prices of the securities in which it is invested rise. If the value of the securities purchased by Tulip in stock market rose from $1,000 at the beginning of 2008 to $1,500 at the end of 2008, the mutual fund earned a $500 profit.
Mutual Funds Basics: Who will get the profit?
As an introduction to the concepts of mutual funds, here is one question regarding mutual funds basics:
Who will get the profit from mutual funds?
Like the rest of the mutual fund’s money, its profits belong solely to the investors – whether redeemed or reinvested.
This illustration depicts how mutual funds work basically.
The investors would give their money to the bank to invest in a mutual fund. Bank has its in-house fund manager, who will gather pool of investments and decide which investment mix (E.g, 50% stocks + 50% bonds) is ideal, upon the supervision of the director. Then money earned (returns) from the said investment mix would be either be redeemed by the investors or reinvested again to the mutual funds.
If the investor chose to redeem the mutual funds, then he or she will get the original money invested plus the profits.*
If the investor chose to reinvest, the original money invested plus the profits will be again part of the pool. Since the money, because of the added profit, has now larger in value, then the will be returns for reinvesting would be bigger.*
*Assuming that the investment mix grew and earned profits.