Whether you’re saving for your children’s college, your own retirement, or a more short-term goal, there’s a way you can reach your financial goal faster. Investing in a mutual fund can help you increase your funds quickly.
Though many Americans avoid investing in mutual funds because they think the fees and financial requirements are high, this couldn’t be farther from the truth. With just a few hundred dollars, you can buy shares in a mutual fund and make more money.
What Are Mutual Funds?
You don’t need to be a financial expert to master a mutual fund. Mutual funds are a great way to invest your money because they require minimal effort. Mutual funds pool money from several different investors, or people, and invest that money in different securities. The fund manager handles the actual investing process, buying and selling mutual funds’ stocks and bonds as he or she sees fit.
Mutual funds come with very little risk. If a sole individual invested the same amount of money into a single stock, the overall risk would be far higher because their return relies on the success of just one company. With a mutual fund, the failure of one company is balanced out by the success of others, making it an overall safer investment. And your manager will determine the level of risk or expected return, changing the investment strategy as needed to help you reap the biggest benefit.
Additionally, investing in a mutual fund is much easier than holding the same amount of securities on your own. Mutual funds often have access to deals the average person does not – meaning your money can do more when it’s pooled together with other investors. And mutual funds offer an opportunity for greater diversification with less money. Compared to an average savings account, a mutual fund will generate significantly higher returns with low risk.
How Mutual Funds Earn You Money
Once you’ve set up your mutual fund, you’ll quickly start reaping the benefits of your investment. Mutual funds generate money for the investor in three ways:
- Dividends on stock and interest on bonds. Mutual funds pay out much of their income after receiving dividends and interest, and you can choose to keep the money or reinvest it into the fund.
- Capital gains. As the mutual fund’s securities increase in value, the fund makes money by selling them. This money is paid out yearly to investors, after the fund subtracts any losses.
- An increase in net asset value (NAV). The NAV is the total value of all the securities in a mutual fund, and the NAV per share is this total value divided by the number of shares. As the securities gain value, the NAV increases, so every share of the mutual fund increases in value.
Each of these methods can generate income, or a return on your initial investment. Because there’s such variety in how mutual funds can earn money, they’re an investment that makes it easy to start raking in more money. Some mutual funds start earning within just a few months, while others can take just one year to see a return – and thanks to their liquid nature, you can access that money as needed.
How to Choose a Mutual Fund
When choosing a mutual fund, ask yourself a few important questions. What are you trying to get out of a mutual fund? Do you prefer long term gains or steady income? What are you investing for? The different types of mutual funds vary in risk, return, and payout structure, so chances are there is an option that fits your needs.
Different mutual funds are structured differently, depending on the manager’s preferences and the investors’ goals. The main types are:
- Money Market: These funds invest in high-quality, risk-free assets like US treasury bills, but offer lower returns than other types of mutual funds.
- Fixed Income: This fund type invests in bonds that can vary in risk depending on the quality of the issuing company. These funds offer higher returns than money market funds, but lower returns than equity funds.
- Bonds: A sort of middle ground, these mutual funds have a longer maturity period and higher interest.
- Equity: Invest in stock from several companies. They are the biggest category of funds and the most volatile, but can typically have higher returns. There are several different styles of equity funds, differing mostly in the type of company they invest in.
- Stocks: These larger funds are typically issued by smaller companies and have the biggest potential earnings, but they also carry the biggest risk of all mutual funds.
The mutual fund you choose determines how much money you can potentially make. On average, Motley Fool¹ reports that a money market mutual fund earns 3 to 4 percent over its lifetime. A bond mutual fund sees returns of 5 to 6 percent, while stock mutual funds reap the biggest income with an average of 10 percent.
The best part about having so many different mutual fund options is you aren’t limited when selecting a mutual fund. Many companies that sell mutual funds have online services to help you sort through what kind of mutual fund you should buy shares in, and these services can make your first investment a breeze.
A Mutual Fund Could Increase Your Savings Today
Many people assume all mutual fund fees and minimum investments are high, making the expense and financial risk too dangerous. However, mutual funds are some of the easiest investments to make – and the risks aren’t nearly as high as investing in individual stocks.
There are a wide variety of mutual funds for every price range, every savings goal, and every kind of investor. And you don’t have to be a financial expert to start earning money on your current savings. Given the thousands of options out there, with a little research you could find one that fits your budget and your goals easily. Comparing different mutual funds will also give you the information you need to choose an investment option that meets all of your goals.
Like anything, it’s always a good idea to be aware of the latest research. We recommend comparing at least 3 or 4 options before making a final decision. Doing a search online is typically the quickest, most thorough way to discover all the pros and cons you need to keep in mind.