How Do You Make Money From a Mutual Fund? (Explained!)

Mutual funds are one of the best ways to manage your money, and they can be a significant help in saving you money. But mutual funds can also make you money in multiple different ways. Some of them are riskier than others, but it’s up to you how much you want to gain and risk.

The three main ways you can make money with a mutual fund mainly depend on investment and stock trends. If the trends are more positive, then you will have a higher chance of making money with a mutual fund.

The following article is a more in-depth explanation of each of the ways to make money from mutual funds.

Three Ways To Make Money With a Mutual Fund

The three main ways you can make money with a mutual fund include:

• Earning money from dividends
• An increase in the price of securities
• A fund share price increase

Each one is a good way to make money, but some are riskier than others.

Mutual funds are professionally managed investments that can be used to purchase stocks and bonds, known as securities. As a result, the movement and trends of the securities affect how much money you’ll be able to make.

Income Earned From Dividends

Dividends are amounts of money paid by a company to its shareholders. This is the easiest and most common way to make money from mutual funds. The higher a dividend yield is, the more likely you’ll be able to make some money from it.

When a company puts stock out for people to invest in, the people that purchase some of the stock will get a dividend of the income made from the stock. The more you invest into a portion of stock, the higher your dividend will be. Dividends are usually paid out once a year, and are the most consistent form of income from mutual funds.

Mutual funds pay out dividends by passing them on to their shareholders, which are the people that purchased a portion of the stock. The shareholders can then keep that money and use it as they please, or reinvest the dividend income back into the company’s stock.

Dividends also pay out two forms of interest, which are called debt securities and coupon payments. Debt securities are also known as corporate or government bonds, and they ensure their owners have a consistent stream of income.

Coupon payments are a percentage of the bonds face value, or a part of their total cost. A higher interest rate of either of these forms means that you won’t have as large a payout, while lower interest rates mean you will likely make more income.

Increase In The Price of Securities

Securities is another word for the stocks, bonds, and other investments you can purchase with a mutual fund. If the prices of these securities increase, then it means you can make more money from others that purchase them. This is known as capital gain.

Capital gains usually fall into two different categories, short-term and long-term. Short-term capital gains are earned after you have had the stock in your mutual fund for one year or less.

The payments from these capital gains are usually lower, but they can also increase significantly if the security becomes popular. This type of capital gain is also taxed differently compared to long-term capital gains.

Short-term capital gains are taxed as ordinary income and don’t affect an investor’s tax return too much. These capital gains are better for investors that have put small amounts of money into their securities and have a more likely but lower payout.

Long-term capital gains are riskier, but they typically turn out larger payments. These capital gains refer to securities you have had for more than a year, and the income you get after selling them. The longer you hold onto a security, the more likely the price of it will go up and you can sell it for more than you bought it for.

It is worth noting that long-term capital gains are taxed differently than short-term capital gains. The most common tax rate on long term gains is 15% if their income falls below the following numbers:

• $441,450 for a single filer
• $248,300 for married couples filing individually
• 496,600 for married couples filing together

It’s recommended to have both short and long-term capital gains in your mutual fund, to ensure that you get a fairly equal chance of gaining some income from your securities.

Fund Share Price Increase

Fund shares can increase in price if the holdings increase in price, but the fund manager doesn’t sell them. If this happens, then you can sell your shares and securities for more than you bought them for and turn a profit.

A company’s stock prices all depend on how profitable and successful the company is. The more successful a company is on the market, then the more desirable its shares and assets become.

Shareholders then might sell any stock they have to other investors for more than they bought it for originally in order to turn a profit. Shareholders might also sell stock that isn’t doing well so they can get some kind of profit from a bad investment.

Mutual funds can also impact the prices of stock shares on the market. They usually generate an immediate increase or decrease in the price of stock shares.

Your mutual fund manager might sell or purchase a large number of shares all at once depending on how the stock market is behaving. This can then affect how much certain stock shares will cost, and how many investors start gravitating towards the shares.

Final Thoughts

Mutual funds are a great way to help you make some money on the side, especially since a professional will be handling most of the investing and selling of stock. Each of these three ways are very effective, but there may be one that works better for you than others.

Sources used:

• https://www.educatorsfinancialgroup.ca/learning-centre/mutual-funds-101-mutual-fund-make-money/
• https://www.investopedia.com/articles/investing/082415/how-mutual-funds-pay-dividends-overview.asp
• https://www.investopedia.com/terms/c/capitalgain.asp
• https://www.investopedia.com/articles/investing/110315/how-mutual-funds-affect-stock-prices.asp
• https://www.investopedia.com/terms/m/mutualfund.asp