You might have heard experts vouching for mutual funds as a lucrative investment. They emphasize on the fact that mutual fund investments have the potential to give you good returns while diversifying the portfolio. However, it is also pointed out that you should refrain from investing in mutual funds unless you have adequate knowledge about its working and underlying risk.
So, if you have been planning to invest in mutual funds and would like to know how you can earn through them, here is a small mutual fund investment guide for your help.
Table of Contents
What Are Mutual Funds?
A mutual fund is a type of investment vehicle that helps you invest in several securities in one go with a small amount. The mutual fund company pools the money of various investors like you, to invest in a basket of diversified securities like bonds and stocks. A mutual fund is managed by a professional fund manager who monitors the performance of the fund. Every investor has a share in the mutual fund according to his investment and he/she receives the pro-rata loss or profit based on the performance of the fund.
You can explore the different types of mutual fund and choose the one that suits your financial comfort and risk tolerance.
How Can You Earn Money Through Mutual Funds?
- Earning by interest/dividend – A fund invested in bonds can help you earn interest income. Similarly, you get a chance to earn cash dividends if your fund is invested in stocks.
- Increase in the value of the mutual fund scheme – If the value of the mutual fund scheme increases and the fund manager does not sell it off, you can sell your share in the fund to earn profits in the market.
- Profit from sale of securities- Fund managers sell the securities of the fund when their price increases. The gain received from this sale is called capital profit. This profit is passed down to the investor.
Things You Should Keep in Mind Before Investing in Mutual Funds
Eye A Long-Term Investment
Experts opine that there are more chances of earning a high return when the mutual fund investment is held for the long term. While starting a mutual fund investments, it is suggested that you stay invested for at least 5 years. Investing your fund for a long term helps stabilize the market volatility while compounding your wealth.
Know Before You Invest
Mutual funds are subject to market risk, which is why it is crucial to do your own research about the fund before investing. Unless you know what a mutual fund is, and how it is operated, it is better not to risk your money. You should first gather adequate knowledge about the mutual funds and different fund options available before investing. Also, avoid investing based on the preference of your peers, or family. It is best to weigh your risk tolerance and financial comfort before you pick a mutual fund scheme.
Over the past few years, mutual funds have gained quite a popularity as a preferred investment option. They are not only handled by professional fund managers but are also capable of giving you high returns. So, if you are looking forward to earning good returns over a longer duration of investments, investing in mutual funds could be beneficial for you. Happy investing!