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What Are Mutual Funds? Understanding The Basics

January 20, 2021

If you’re one of those investors with very little time to research and invest in individual stocks, it might be a good idea to look into investing in mutual funds.

Whether your goal is to save money for retirement, or for a down payment to buy a house, mutual funds are low-cost and effective way to invest your money.

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What is a mutual fund?

A mutual fund is an investment vehicle in which investors, like you ad me, pool their money together. They use the money to invest in securities such as stocks and bonds. A professional manages the funds.

In addition, mutual funds are cost efficient. They offer diversification to your portfolio. They have low minimum investment requirements.

These factors make mutual funds among the best investment vehicles to use. If you’re a beginner investor, you should consider investing in mutual funds or index funds.

Investing in the stock market in general, can be intimidating. If you are just starting out and don’t feel confident in your investing knowledge, you may value the advice of a financial advisor.

Types of mutual funds

There are different types of mutual funds. They are stock funds, bond funds, and money market funds.

Which funds you choose depends on your risk tolerance. While mutual funds in general are less risky than investing in individual stocks, some funds are riskier than others.

However, you can choose a combination of these three types of funds to diversify your portfolio.

  • Stock funds: a stock fund is a fund that invests heavily in stocks. However, that does not mean stock funds do not have other securities, i.e., bonds. It’s just that the majority of the money invested is in stocks.
  • Bond funds: if you don’t want your portfolio to fluctuate in value as stocks do, then you should consider bond funds.
  • Money market funds: money market funds are funds that you invest in if you tend to tap into your investment in the short term.
  • Sector funds. As the name suggests, sector funds are funds that invests in one particular sector or industry. For example, a fund that invests only in the health care industry is a sector fund. These mutual funds lack diversification. Therefore, you should avoid them or use them in conjunction to another mutual fund.

Additional funds

  • Index funds. Index funds seek to track the performance of a particular index, such as the Standard & Poor’s 500 index of 500 large U.S. company stocks or the CRSP US Small Cap Index. When you invest in the Vanguard S&P 500 Index fund, you’re essentially buying a piece of the 500 largest publicly traded US companies. Index funds don’t jump around. They stay invested in the market. 
  • Income funds: These funds focus invest primarily in corporate bonds. They also invest in some high-dividend stocks.
  • Balance funds: The portfolio of these funds have a mixed of stocks and bonds. Those funds enjoy capital growth and income dividend.

Related Article: 3 Ways to Protect Your Portfolio from the Volatile Stock Market

The advantages of mutual funds

Diversification. You’ve probably heard the popular saying “don’t put all of your eggs in one basket.” Well, it applies to mutual funds. Mutual funds invest in stocks or bonds from dozens of companies in several industries.

Thus, your risk is spread. If a stock of a company is not doing well, a stock from another company can balance it out. While most funds are diversified, some are not.

For example, sector funds which invest in a specific industry such as real estate can be risky if that industry is not doing well.

Get Matched With 3 Fiduciary Financial Advisors
Investing in the stock market can be intimidating and overwhelming. We recommend speaking with a financial advisor. The SmartAsset’s free matching tool will pair you with up to 3 financial advisors in your area.

Here’s how it works:

1. Answer these few easy questions about your current financial situation

2. In just under one minute, the tool will match you with up to three financial advisors based on your need.

3. Review the financial advisors profiles, interview them either by phone or in person, and choose the one that suits your’ needs.

Get Started Now>>>

Professional Management.

Mutual funds are professionally managed. These fund managers are well educated and experienced. Their job is to analyze data, research companies and find the best investments for the fund.

Thus, investing in mutual funds can be a huge time saver for those who have very little time and those who lack expertise in the matter.

Cost Efficiency. The operating expenses and the cost that you pay to sell or buy a fund are cheaper than trading in individual securities on your own. For example, the best Vanguard mutual funds have operating expenses as low as 0.04%. So by keeping expenses low, these funds can help boost your returns.

Low or Reasonable Minimum Investment. The majority of mutual funds, Vanguard mutual funds, for example, have a reasonable minimum requirement. Some funds even have a minimum of $1,000 and provide a monthly investment plan where you can start with as little as $50 a month.

Related Article: 7 Secrets Smart Professionals Use to Choose Financial Advisors

The disadvantage of mutual funds.

While there are several benefits to investing in mutual funds, there are some disadvantages as well. 

Active Fund Management. Mutual funds are actively managed. That means fund mangers are always on the look out for the best securities to purchase. That also means they can easily make mistakes.

Cost/expenses. While cost and expenses of investing in individual stocks are significantly higher than mutual funds, cost of a mutual fund can nonetheless be significant.

High cost can have a negative effect on your investment return. These fees are deducted from your mutual fund’s balance every year. Other fees can apply as well. So always find a company with a low cost. 

How you make money with mutual funds.

You make money with mutual funds the same way you would with individual stocks: dividend, capital gain and appreciation.

Dividend: Dividends are cash distributions from a company to its shareholders. Some companies offer dividends; others do not. And those who do pay out dividends are not obligated to do so. And the amount of dividends can vary from year to year.

As a mutual fund investor, you may receive dividend income on a regular basis.

Mutual funds offer dividend reinvestment plans. This means that instead of receiving a cash payment, you can reinvest your dividend income into buying more shares in the fund.

Capital gain distribution: in addition to receiving dividend income from the fund, you make money with mutual funds when you make a profit by selling a stock. This is called “capital gain.”

Capital gain occurs when the fund manager sells stocks for more he bought them for. The resulting profits can be paid out to the fund’s shareholders. Just as dividend income, you have the choice to reinvest your gains in the fund.

Appreciation: If stocks in your fund have appreciated in value, the price per share of the fund will increase as well. So whether you hold your shares for a short term or long term, you stand to make a profit when the shares rise. 

Best mutual funds.

Now that you know mutual funds make excellent investments, finding the best mutual funds can be overwhelming. 

Vanguard mutual funds.

Vanguard mutual funds are the best out there, because they are relatively cheaper; they are of high quality; a professional manage them; and their operating expenses are relative low. 

Here is a list of the best Vanguard mutual funds that you should invest in:

  • Vanguard Total Stock Market Index Funds
  • Vanguard 500 Index (VFIAX)
  • Total International Stock index Fund
  • Vanguard Health Care Investor

Vanguard Total Stock Market Fund 

If you’re looking for a diversified mutual fund, this Vanguard mutual fund is for you. The Vanguard’s VTSAX provides exposure to the entire U.S. stock market which includes stocks from large, medium and small U.S companies.

The top companies include Microsoft, Apple, Amazon. In addition, the expenses are relatively (0.04%). It has a minimum initial investment of $3,000, making it one of the best vanguard stock funds out there.

Vanguard S&P 500 (VFIAX)

The Vanguard 500 Index fund may be appropriate for you if you prefer a mutual fund that focuses on U.S. equities. This fund tracks the performance of the S&P 500, which means it holds about 500 of the largest U.S. stocks.

The largest U.S. companies included in this fund are Facebook, Alphabet/Google, Apple, and Amazon. This index fund has an expense ration of 0.04% and a reasonable minimum initial investment of $3,000.

Vanguard Total International Stock Market

You should consider the Vanguard International Stock Market fund of you prefer a mutual fund that invests in foreign stocks.

This international stock fund exposes its shareholders to over 6,000 non-U.S. stocks from several countries in both developed markets and emerging markets. The minimum investment is also $3,000 with an expense ratio of 0.11%.

Vanguard Health Care Investor

Sector funds are not usually a good idea, because the lack diversification. Sector funds are funds that invest in a specific industry like real estate or health care. However, if you want a fund to complement your portfolio, the Vanguard Health Care Investor is a good choice.

This Vanguard mutual fund offers investors exposure to U.S. and foreign equities focusing in the health care industry. The expense ration is a little bit higher, 0.34%. However, the minimum initial investment is $3,000, making it one of the cheapest Vanguard mutual funds.

Bottom Line

Mutual funds are great options for beginner investors or investors who have little time to research and invest in individual stocks. When you buy into these low cost investments, you’re essentially buying shares from companies.

Your money are pooled together with those of other investors. If you intend to invest in low cost investment funds, you must know which ones are the best. When it comes to saving money on fees and getting a good return on your investment, Vanguard mutual funds are among the best funds out there.

They provide professional management, diversity, low cost, income and price appreciation.

What’s Next: 5 Mistakes People Make When Hiring A Financial Advisor

Speak with the Right Financial Advisor

  • If you have questions beyond knowing which of the best Vanguard mutual funds to invest, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
  • Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
*TOP CIT BANK PROMOTIONS*
PROMOTIONAL LINK OFFER REVIEW
CIT Bank Money Market 1.00% APY Review
CIT Bank Savings Builder 0.95% APY Review
CIT Bank CDs 0.75% APY 1 Year CD Term Review
CIT Bank No Penalty CD 0.75% APY Review

The post What Are Mutual Funds? Understanding The Basics appeared first on GrowthRapidly.

Source: growthrapidly.com

How To Retire At 50: 10 Easy Steps To Consider

January 14, 2021

Can you retire at 50? On average, people usually retire at 65. But what if you want to retire 15 years earlier than that like  at 50? Is it doable? Below are 10 easy steps to take to retire at 50.  Retiring early can be challenging. Therefore, SmartAsset’s free tool can match you with  a financial advisor who can help to work out and implement a retirement income strategy for you to maximize your money.

10 Easy & Simple Steps to Retire at 50:

1. How much you will need in retirement.

The first thing to consider is to determine how much you will need to retire at 50. This will vary depending on the lifestyle you want to have during retirement. If you desire a lavish one, you will certainly need a lot.

But according to a study by SmartAsset, 500k was found to be enough money to retire comfortably. But again that will depends on several factor.

For example, you will need to take into account where you want to live, the cost of living, how long you expect to live, etc.

Read: Can I Retire at 60 With 500k? Is It Enough?

A good way to know if 500k is possible to retire on is to consider the 4% rule. This rule is used to figure out how much a retiree should withdraw from his or her retirement account.

The 4% rule states that the money in your retirement savings account should last you through 30 years of retirement if you take out 4% of your retirement portfolio annually and then adjust each year thereafter for inflation.

So, if you plan on retiring at 50 with 500k for 30 years, using the 4% rule you will need to live on $20,000 a year. 

Again, this is just an estimation out there. You may need less or more depending on the factors mentioned above. For example, if you’re in good health and expect to live 40+ years after retiring at 50, $500,000 may not be enough to retire on. That’s why it’s crucial to work with a financial advisor.

Get Matched With 3 Fiduciary Financial Advisors
Managing your finances can be overwhelming. We recommend speaking with a financial advisor. The SmartAsset’s free matching tool will pair you with up to 3 financial advisors in your area.

Here’s how it works:

1. Answer these few easy questions about your current financial situation

2. In just under one minute, the tool will match you with up to three financial advisors based on your need.

3. Review the financial advisors profiles, interview them either by phone or in person, and choose the one that suits your’ needs.

Get Started Now>>>

2. Maximize your tax-advantaged retirement accounts.

Once you have an idea of how much you need in order to retire at 50, your next step is to save as much as possible at a faster rate. If you are employed and you have a 401k plan available to you, you should definitely participate in it. Nothing can grow your retirement savings account faster than a 401k account.

See: How to Become a 401k Millionaire.

That means, you will need to maximize your 401k contributions, for example. In 2020, and for people under 50, the 401k contribution limit is $19,500.  Also, take advantage of your company match if your employee offers a match.

In addition to the maximum contribution of $19,500, your employer also contributes. Sometimes, they match dollar for dollar or 50 cents for each dollar the worker pays in.

In addition to a 401k plan, open or maximize your Roth or traditional IRA. For an IRA, it is $6,000. So, by maximizing your retirement accounts every year, your money will grow faster.

3. Invest in mutual or index funds. Apart from your retirement accounts (401k, Roth or Traditional IRA, SEP IRA, etc), you should invest in individual stocks or preferably in mutual funds. 

4. Cut out unnecessary expenses.

Someone with the goal of retiring at 50 needs to keep an eye on their spending and keep them as low as possible. We all know the phrase, “the best way to save money is to spend less.”

Well, this is true when it comes to retiring 15 years early than the average.  So, if you don’t watch TV, cancel Netflix or cable TV. If your cell phone bill is high, change plans or switch to another carrier. Don’t go to lavish vacations.

5. Keep an eye on taxes.

Taxes can eat away your profit. The more you can save from taxes, the more money you will have. Retirement accounts are a good way to save on taxes. Besides your company 401k plan, open a Roth or Traditional IRA.

6. Make more money.

Spending less is a great way to save money. But increasing your income is even better. If you need to retire at 50, you’ll need to be more aggressive. And the more money you earn, the more you will be able to save. And the faster you can reach your early retirement goal.

7. Speak with a financial advisor. 

Consulting with a financial advisor can help you create a plan to. More specifically, a financial advisor specializing in retirement planning can help you achieve your goals of retiring at 50. They can help put in a place an investment strategy to put you in the right track to retire at 50. You can easily find one in your local area by using SmartAsset’s free tool. It matches users with financial advisors in just under 5 minutes.  

8. Decide how you will spend your time in retirement.

If you will spend a lot of time travelling during retirement, then make sure you do research. Some countries like the Dominican Republic, Mexico, Panama, the Philippines, and so many others are good places to travel to in retirement because the cost of living is relatively cheap.

While other countries in Europe can be very expensive to travel to, which can eat away your retirement money.  If you decide to downsize or sell your home, you can free up more money to spend.

9. Financing the first 10 years.

There is a penalty of 10% if you cash out your retirement accounts before you reach the age of 59 1/2. Therefore, if you retire at 50, you’ll need to use money in other accounts like traditional savings or brokerage accounts. 

10. Put your Bonus, Raise, & Tax Refunds towards your retirement savings. 

If retiring at 50 years old is really your goal, then you should put all extra money towards your retirement savings. That means, if you receive a raise at work, put some of it towards your savings account.

If you get a tax refund or a bonus, use some of that money towards your retirement savings account. They can add up quickly and make retiring at 50 more of a reality than a dream.

Retiring at 50: The Bottom Line: 

So can I retire at 50? Retiring at 50 is possible. However, it’s not easy. After all, you’re trying to grow more money in less time. So, it will be challenging and will involve years of sacrifices, years living below your means and making tough financial decisions. However, it will be worth it in the long run. 

Read More:

  • How Much Is Enough For Retirement
  • How to Grow Your 401k Account
  • People Who Retire Comfortably Avoid These Financial Advisor Mistakes
  • 5 Simple Warning Signs You’re Definitely Not Ready for Retirement

Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning to retire at 50, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

The post How To Retire At 50: 10 Easy Steps To Consider appeared first on GrowthRapidly.

Source: growthrapidly.com