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How exactly does mutual funds work?

April 3rd, 2010

Hello, as a beginner investor how do you actually earn money from mutual funds? I heard that it’s not about compounding interest and that it’s about the NAV on the day you wish to withdraw the funds that will determine your profit?

I had a perception that it was like time deposit, that your initial investment will earn interest and interest is added up to your initial investment and it will compound over time only that the interest rates varies every time. This is not the case in mutual funds right or is it?

Can someone enlighten me on this? Thanks.
Note: I know what a mutual fund is at least it’s general idea that it’s composed of diversified investments managed by a fund manager. My question is how do you earn technically? Is it like compounding interest or not?