Making Money With Money: Mutual Funds

A Mutual Fund is an investment where your money becomes managed by a shareholder who then takes your money and puts it into a multitude of investments.

Mutual Funds are a personal favorite of mine because they can earn a decent amount of interest without all the risks of a stock. Also, A Mutual Fund is a great way to create a more diversified portfolio because when you invest into one Mutual Fund, you are also investing in multiple stocks and bonds!

How Does a Mutual Fund Work?
The way a mutual fund works is that you, along with other investors, will invest into a mutual fund and the money that is invested will be managed by a shareholder. That shareholder takes the combined contributions of everyone and invests it into other investments such as stocks, bonds, CDs, etc. which then earns interest that can be compounded so that it too can earn interest.

Why Should I Invest in a Mutual Fund?
Mutual Funds are very diversified since your money is not just going into one stock, it’s going into several stocks with little effort on your part. All you have to do is choose the type of Mutual Fund that is right for you and one that shows a lot of promise.

Plus, you have multiple types of Mutual Funds to choose from! You could choose one that only deals with bonds or only deals with stocks. Taking that a step further, you could choose to have a Mutual Fund that only deals with the stocks of high-level companies or ones that are just starting out.

However, you will have to pay a fee or commission to the shareholder who is managing your money and a fee to reinvest your earnings. Usually, these fees are only a small portion, 3% or less, of what you invest.

Something to keep in mind is that Mutual funds don’t do well as short-term investments so keep your investments for more than 5 years to ensure that you earn an average annual interest that is around 9%. If you don’t invest long-term then you might lose money on your investment.

Top 3 Types of Mutual Funds:
There are several different types of Mutual Funds to choose from. You should invest in multiple types to create more diversity in your portfolio and to make sure that you never completely lose money one year.

Equity Fund:
An Equity Fund deals primarily in stocks which is why they are also called Stock Funds. Equity Funds can be even more specific with multiple types of stocks to choose from such as ones that only deal with international stocks or domestic stocks. It doesn’t stop there! You could even choose to have an Equity Fund that only deals with well-established companies or you could invest in smaller companies. These types of Equity Funds are called either Micro cap, Small cap, Mid cap, Large cap, or Mega cap which is based on the company’s size.

Equity Funds tend to be riskier since stocks can be very unpredictable but that also means they tend to have a higher rate of return. If you just make sure to have a variety of different Equity Funds that you invest in then you’ll be a lot safer and profit a lot more in the end.

Fixed-Income Fund:
Unlike an Equity Fund, a Fixed-Income Fund deals primarily with bonds. With this type of fund, you earn interest on a regular basis at a set amount which makes it a good way to have your money earn money so that you can increase your income.

A Fixed-Income Fund is a lot less risky than an Equity Fund but that also means that you will earn less from your Investments. Since they do earn less, make sure that you have a proper plan so that you are earning an average annual rate that’s above 4% (The Rate of Inflation) or you won’t actually be profiting.

Money Market Fund:
A Money Market Fund deals primarily with short-term debt securities, like Treasury Bonds or CDs. Since the investments are so short-term, this fund has more liquidity than the others.

Out of the three main types, this fund is the only one where you don’t have to worry about losing your initial investment. Since it is so much safer, this means that you will earn the least from the three. It’s still better than just throwing your money into a regular savings account though due to the slightly higher interest rate and the fact that they can be tax-free.

Extra Types of Funds:
These Funds are subcategories of the main 3 above.
• Balanced Fund
• Index Fund
• Specialty Fund
• Funds-of-fund

What does it mean when an account is passively/actively managed?
There are two different ways to have your account managed, actively or passively. Usually, a Mutual Fund is actively managed which means that an actual person manages your investment and decides what to invest in.

However, an Index Fund is passively managed. These funds are managed by a machine which automatically puts your money into a wide range of stocks like the S&P 500 index.

What Kind of Return Rate Should You Expect?
Depending on the type of Fund you get, the return rate will vary. Equity Funds will have a higher return rate of return than a Fixed-Income Fund and a Fixed-Income Fund will have a higher interest than Money Market Funds.

You can find Mutual Funds that have an average annual return rate of 12% that have a fairly long track history. Mutual Funds with just a 9% average annual interest rate is still really good and better than a majority of Funds. You’ll only find these types of returns from Equity Funds.

Fixed-Income Funds tend to have a return rate around 5% but can go as high as 7% which is better than not investing at all.

A Money Market Fund earns the least amount of return with barely a .5% return rate but it’s still better than a regular savings account mainly because they can be tax-free funds.

Please be aware that just like any investment, a mutual fund can make you lose money if you don’t use a proper investment strategy.

It’s also very important that you understand that Mutual Funds don’t make good short-term investments. I know I’ve said that before but hopefully that will help you remember later on if you start thinking about emptying out your investments too early.

I would recommend sticking with Equity Funds, and Fixed-Income Funds because Mutual Funds are fairly safe as is since there is a professional behind it all who is taking care of things. The only thing you have to do is make sure you are investing regularly into several different accounts.

After you start investing, all you’ve got to do is watch as the money builds up and up and up! So get to work!

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