Tuesday, 6 March 2018

Mutual Funds and Making Money

The type of mutual fund in which you invested will determine how you generate cash. If you own a stock fund, you've probably already learned that the biggest sources of potential profit are an increase in the stock price (capital gains) or cash dividends paid to you for your pro-rata share of the company's distributed profits. 

If the fund focuses on investing in bonds, you might be making money through interest income. If the fund specializes in investing in real estate, you might be making money from rents, property appreciation, and profits from business operations, such as vending machines in an office building.

Three Keys to Making Money

There are three major keys to making money through mutual fund investing. These are:

Only Invest in Mutual Funds You Understand: If you can't explain, quickly, succinctly, and with specificity, exactly how a mutual fund invests, what its underlying holdings are, what the risks of the mutual fund's investment strategy are, and why you own a particular mutual fund, you probably shouldn't have it in your portfolio. It's much easier to measure, contain, and appreciate risk when you keep things simple.

Think In Periods of 5 Years or More: It's much easier to let your wealth compound if you can ride out the sometimes sickening waves of market volatility that is part and parcel of investing in stocks or bonds. If you own, say, an equity mutual fund, be prepared for it to decline by 50% in any given year. These things happen. Presuming you've drawn up a well-researched, sound plan based on common sense, basic mathematics, and prudent risk management strategies, allowing yourself to become emotional and selling your productive assets at the worst possible time is not likely to cause you to build long-lasting generational wealth.

Pay Reasonable Expenses: Apart from the mutual fund's expense ratio, it is also important to consider a handful of other costs. Tax efficiency matters. Income needs matter. Risk exposure matters. All need to be weighed against each other and other relevant factors. The point is to make sure you are getting value for what you pay.

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