Accounting Cash Flows Where Would Investment Dividend Income Go Mutual Fund Investing 101: How You Make Money

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Mutual Fund Investing 101: How You Make Money

How do you make money by investing in mutual funds? Basically there are two ways to make money and two ways to lose money by investing in mutual funds. Let’s get down to the basics.

There are thousands of funds to choose from, and most of them fall into one of four categories based on where they invest money (your money). They are called: equity (stock), bond, money market and balanced fund. In all of the above, you open an account, invest money, and this buys your shares. You invest money based on the number of shares you own. That’s what happens if you lose money investing.

Let’s start with the most popular and risky category called equity funds, which invest money in stocks, also known as “equities”. Why invest here? Growth is the primary objective, with dividend income as a secondary objective. You invest money here when the share price increases and from dividends. When the share price goes down, you lose money. This dividend comes from the shares in the fund portfolio and is paid to you. They (like all dividends) belong to you. Primary attraction of equity funds: Potential for high returns.

Bond funds have one primary objective: high income in the form of dividends. They are also called INCOME FUNDS and are generally safer than the equity type. You invest money here to get higher dividends than you can get elsewhere. Dividends are derived from the interest earned on the fund’s bond portfolio. You can invest money when the share price rises; And lose money when the share price goes down. Generally, there is much less price volatility than you would find in the equity or stock category.

Balanced funds are a happy medium between the two above, as they invest money in both stocks and bonds. So you make money from both rising share prices and dividends, and lose investment money when share prices fall. Here you have moderate risk.

Money market funds are safe options and you only invest money in them in one way: dividends. They invest money and earn interest in high-quality, short-term IOUs (in the money market). This interest they give you as dividend. The share price is at $1 and does not fluctuate. Investors rarely lose their money while investing here.

Many people invest money in mutual funds as a long-term investment. Therefore, in most cases those funds allow the company to reinvest all dividends (and other distributions) to buy more shares. Distributions (such as capital gains from the sale of stock) are a bit technical. Don’t worry – if you have them coming, you’ll get your share. And you will also receive periodic statements showing your account activity.

In the beginning we said that there are two ways to earn money and there are two ways to invest money in mutual funds. What is another way you can lose money? Let me give you an example, and as a former financial planner I’ve seen it happen time and time again. Joe Blow decides to invest in mutual funds through a “financial planner” (not me). He put $20,000 into a stock fund and about a year later he looked at his latest statement and saw a net worth of $19,000.

The stock market showed modest growth that year. How did he lose money while investing? Answer: $1000 came up for a sales charge called “load”. About $300 went to annual fund costs and another $300 to additional fees. Joe claims he knows nothing about these charges and fees.

Investing in mutual funds does not require paying a huge amount of money. If Joe had gone with the NO-LOAD fund, he could have invested about $200 a year in total expenses for expenses. You can earn money by investing in mutual funds for long term. Don’t work against yourself by simply losing money to higher fees and charges.

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