ad

Monday, 2 April 2018

How does a mutual fund make me money?



The more you know about what’s in your portfolio, the better chances you have of realizing your investment and savings goals.

When it comes to mutual funds, you can make money in three possible ways:

Income earned from dividends on stocks and interest on bonds. A mutual fund pays out nearly all of the net income it receives over the year (in the form of a distribution).

An increase in the price of securities (called a ‘capital gain’). Most funds also pass these gains on to their investors.

The fund share price increases. This happens if fund holdings increase in price. You can then sell your shares for a profit.

You are usually given the choice whether to receive a cheque for distributions or to reinvest the earnings and get more units.

“Whether you take the funds to cover day-to-day expenses, put it in an emergency fund, or reinvest the money—every decision comes with different tax implications. That’s why it’s important to discuss your options first with your financial advisor”, says Educators Certified Financial Planner professional Mike Cunningham.

Mutual funds can save you money, too.

Mutual funds can affect your savings directly (as in how much they increase in value) and indirectly (as in how much you save).

“At Educators, we know that education members have different reasons to save. Their retirement is longer than most. Or they’re saving for that 4 over 5. Mutual funds can be one of the ways they can maximize their savings”, says Karen Hubbard, Regional Assistant Vice-President, Client Advisory Services, Educators Financial Group.

Many experts say that one of the prime advantages of mutual funds is the professional management they provide for your money.

That’s because the cost of mutual funds makes professional advice available to all Canadians, whether the amount they have to invest is large, small, or somewhere in between. In fact, 19% of mutual fund investors had less than $5,000 in financial assets when they first started using an advisor and 50% had less than $25,000*.

With mutual funds, you’ll also benefit from economies of scale.

That’s because a mutual fund buys and sells large amounts of securities at one time, so its transaction costs are lower than what you would incur for securities transitions as an individual. Yet another benefit if you happen to be investing a smaller amount of money, because it allows you to participate through a ‘pooled’ approach. If you were trading stocks and bonds as an individual, it would cost a lot more.

No comments:

Post a comment