Many people are investing into funds (mutual funds), but have minimal or not any ideas what is the mutual fund and how is it working. There are numerous explanations of the funds mechanics, but most (if not all) of them are so complicated, few people can grasp it.

KISS (Keep It Simple, Stupid)
I will try to give an insight on this topic from various points of view, and today I just give a very short and simple version.
Let’s start with a simple math example (I know, math is boooooring). Imagine, you invested $10 and kept it in your bank for a year; the bank is so generous, it gave you 10% at the end of the year, and you have now $10+$10*10%/100%=$11. Now, what if you had $100? Then you would have $100+$100*10%/100%=$110. Much better, isn’t it?

The More Horses, The Better The Ride
As you’ve noticed, the more money you invest, the better return you can have ($1 versus $10). And there is another issue: if you have only $10 to invest, most of the stocks will not be available to you, because most of them have prices in the $20-$200 per share range; but if you gather with your friends and collect $10,000 altogether, you will be able to buy various stocks, make profit and split it according to the amount of money that was invested. The made profits in stock markets are all about amount of shares you can purchase - the more shares, the more return (I explain this paradox in my future articles).

The Strength In Unity
Mutual fund is like a gang of like minded people who gather together to increase their buying and profit powers, they all bring their money in one pot, which is managed by a group of smart people, who have good education about stock market behavior. When a good opportunity arises, those experts take a portion of money from that pot, buy some stocks and then monitor it closely to see if there is a good opportunity to sell that stock and make profit. When they sell the winning stock, they return all the money back into that pot, thus all the gang suddenly becomes richer for a couple of millions of bucks.
By the end of a year, the pot is reviewed and the excess money are split according to the amounts were put into that pot initially (if you put $10 - you get $11, and if you put $100 - you get $110, and so on). Some portion of the money will be given to the experts as the reward for their excellent job. The gang can spend the extra cash or can put it back into the pot, and get even more extra cash next year.

The mechanics of a mutual fund is quite simple in nature, and I hope this article helps you to understand it. The better you understand it, the smarter you are, the more money you will make by choosing the right fund that will perform better over the years

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