Q&A: How do you make money with mutual funds?
These are useful and collceted by Anne!
Q&A: How do you make money with mutual funds?
This may sound like a basic question but I need help understanding this. How do I make money by investing in a MF? What I mean is, If I put my money into a MF, at what point do I make money? Does it grow so much that I am supposed to live on the dividends at some point?
ANSWER:
Answer by Jumpy
Basically MF has a manager who diversifies your portfolio for you. A bunch of people keep their money in the fund. This fund owns stocks of many companies and your risk is lower. I don’t believe they pay dividends. You just pull your money out of it, when you had enough. Your risk doesn’t get any lower after fund invested in like 30 different companies, yet some funds have like 500 positions. That’s because managers are money grabbing arses, who’re paid commission. I doubt they researched all 500 companies.
Answer by bobby d
Mutual Funds go up and down, just like the stock market. The point should be to live off the profits someday – but you need to continually invest and leave the money in 10-15 years. Unless it’s a retirement account (401K, IRA), you can take the money out when you want – just pay capital gains taxes.
Answer by Marco R
It is effectively like any other investment, in that it can grow by both capital gains (increasing in value) and income (dividends). It is simply a large pool of money belonging to different people, invested as if it were a large individual sum of money. You can calculate the price (NAV, or net asset value) of a fund by adding up the value of all its individual holdings, and then dividing by the number of shares of the mutual fund that are held. So if the total value of the underlying assets increases, then the NAV will increase. The NAV is the price at which you can buy shares or redeem them.
Mutual funds are very diverse, and some focus on capital gains, others on income (holding bonds or high dividend paying stocks). Like a stock, you have have the dividends sent to you, or repurchased into the fund.
You make money as the value of the fund increases, and/or as dividends come in. You can take money out by having dividends sent to you, or selling portions of your holdings.
Follow this link for more info:
http://finance.yahoo.com/funds/basics
Answer by Joseph R
Personally you should not consider buying into mutual funds, most especially “load” funds. Load funds are MFs with management fees. If you want to purchase an MF then get a “no-load” fund which is w/o management fees.
Why not buy into mutual funds is because most funds “promise” you a return on investment through capital gains but as far as I am seeing most of them perform terribly. There are some income paying MFs but I suggest buying stocks that pay dividends quarterly or semi-yearly if you want to live off of them. For growth invest in growth stocks by buying low and selling high, capital gains.
Have your own little portfolio of income-generating funds and let them grow through either constant funding from your paycheck or other source of income or follow DRIP (dividend reinvestment plan).
Of course you must consider taxes on capital gains and dividends. As of today the tax rate on dividends is 15% when NOT follow DRIP.
If you must want to purchase a mutual fund, ask yourself this question. “How do I trust the manager, a total stranger, to handle my money?”
Answer by Repairmanjack
” Load funds are MFs with management fees.”
WRONG!!! Load funds are funds that pay COMMISSIONS to salesmen (they call themselves ‘financial advisors’).
Every mutual fund has management fees. Every one. It’s in the expense ratio.
You may not make money investing in a mutual fund…you may lose money. But over time, usually you make money if you leave your money alone and don’t try to move it around to different funds a lot.
Mutual funds are basically just a lot of stocks under one ‘umbrella’…the fund. There can be all types of stocks – some funds just hold stocks of tiny companies (micro-caps). Some hold only large companies, some hold real estate, some hold bonds. Some funds are riskier than others. But in the market you always take risk. Over time, though, the market as a whole goes up. And I’m talking years. But it could be down for a couple years. Don’t invest money you will need over the next 1 – 4 years mutual funds. Personally, I keep 7 years of living expenses out of the market.
What you need to do first is assess how much risk you need to take and are willing to take. This site has links to risk assessment quizzes:
http://www.saveyournestegg.com/diy.html
Then, set up your asset allocation, then pick the funds you want.
When you retire, for example, you will want to take on less risk. Then you will want to have a higher percentage of bonds in your asset allocation.
Here’s a site to help you understand:
https://personal.vanguard.com/us/planningeducation/retirement/PEdRetSaveOVContent.jsp?from=A
Over time your investments grow (if you do it right) and you lessen your risk when you are in retirement and have a nice sum built up and an asset allocation that produces income with less risk.
Many studies show that it is safe to withdraw 4 – 5% of your total assets every year to live on in retirement.
Answer by Jeff D
There appears to be a lot of bias in the answers provided thus far. I will attempt to remain a little more objective.
You make money in two ways: when the stocks contained within the fund experience appreciation, and when the stocks pay dividends.
Hope that answers your question.
Answer by Common Sense
There is no simple answer. Your best bet is to read;
“Mutual Funds For Dummy’s”
Mutual Funds invest in different things;
Stocks
Bonds
Reits
etc. or a combination.
The value of the fund will move as the value of the different assets move that are in it (up or down)……
Once you learn about Mutual Funds…… you’ll find they’re an important part of your future. GOOD LUCK!
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