How do you make money investing in mutual funds? There are two ways to make money and two ways to lose money investing in mutual funds. Let's get down to basics.
There are thousands of funds to choose from and the vast majority of them will fall into one of four categories based on where they invest money (your money). They are called: equity (stock), bond, money market, and balanced funds. In all of the above you open an account, invest money, and this buys you shares. You make money investing based on the number of shares you own. The same goes if you lose money investing.
Let's start with the most popular and the so-called EQUITY FUNDS, which invest money in stocks, which are also called “equities”. Why invest money here? The primary objective is growth, with a dividend income as a secondary objective. You make money investing here when the share price goes up, and from dividends. You lose money when the share price goes down. The disputes come from the stocks in the portfolio and are passed on to you. They are like your dividends. The primary attraction of equity funds: the potential for high returns.
BOND FUNDS have a primary objective: higher income in the form of dividends. They are also called INCOME FUNDS, and are the safer than the equity variety. You are investing here to earn higher dividends than you can get elsewhere. The disputes come from the interest earned in the fund's bond portfolio. You can also make money when the share price goes up; and lose money when the share price falls. Normally, there is probably less fluctuation than you'll find in the equity gold stock category.
BALANCED FUNDS are a happy medium between the two above, because they invest money in both stocks and bonds. Here you make a tumble. Here you have moderate risk.
MONEY MARKET FUNDS are the safe alternative and you make money in one way: dividends. They invest money and earn interest in high quality, IOUs short-term (in the money market). This interest is in the form of dividends. Share price is pegged at $ 1 and does not fluctuate. Very rarely do investors lose money investing here.
Most people invest money in mutual funds as a long term investment. So, in most cases they simply allow the fund company to reinvest all the dividends to buy more shares. Distributions (like capital gains from the sale of stock) are a bit technical. Do not worry – if you have them coming, you'll get your share. And you'll also receive periodic statements showing the activity in your account.
In the beginning we said that there are two ways to make money and two ways to lose money investing in mutual funds. What's the second way you can lose money? Let me give you an example, and have a financial planner trainer I've seen this time and time again. Joe Blow to invest in mutual funds through a “financial planner” (not me). He put $ 20,000 into the fund, and was shown at full value of $ 19,000.
The stock market in that year showed a modest gain. How did he lose money investing? Answer: $ 1000 came in for the loads called “loads”. About $ 300 went to annual fund expenses, and another $ 300 to extra fees. Joe claims that he did not know anything about these charges and fees.
It is not necessary to pay big bucks when you invest money in mutual funds. Had Joe gone with NO-LOAD funds, he could have invested for $ 200 a year, for expenses. You can make money investing in mutual funds as a long term investment. Just do not work against yourself by losing money to high charges and fees.
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