How to Build Income through a Mutual Fund

Building income with a mutual fund is generally considered a wise investment strategy. Mutual funds tend to spread risk over a variety of investments, offering a portfolio that can present modest returns in exchange for safe investments. Some mutual funds are more aggressive than others, but you can select the risk profile that is best for your goals. When you are seeking to grow your income through investment, there are some simple steps to follow.

Consider Goals First

It is inadvisable to start investing without setting goals. Like budgeting or saving, investing is a way to reach both short-term and long-term financial goals. You can measure the success of your investments only if you have a goal to achieve. Otherwise, you could be receiving handsome returns but not feel as though you are accomplishing anything. This can lead to impatience, which is never a good quality in an investor. Your goals may be to own a home, save for college or save for retirement. Once you know the approximate sum you need, you can dedicate principal capital toward the fund and begin working to grow that capital to your ultimate investment goal.

Select Risk Profile According to Goals

If your goal is to turn $10,000 into $50,000 in one year, you are going to have to be prepared to take some risks. However, if you are investing $5,000 today with the hopes of earning back $12,000 in four years, you can select less risky mutual fund options. Look at a fund's returns over the previous five to ten years to gain an idea of its absolute return. Ask yourself how long it would take you to reach your goals in a given fund, assuming its returns have low volatility. Then, compare this time frame to another, similar fund and consider which would be a better choice for your goals.

Think Long-Term

Once you make your decision, it is best to stick the choice out in the long term. If you grow impatient and switch your mutual fund class or options before you reach your goals, you may be compromising your initial plan. At some point, if you fear you are missing your goals because your fund is under-performing, you can consider your options. However, you always have to weigh these options against the fees to sell and buy into a new mutual fund. Sticking to an initial plan will typically pay off.

Plan Taxes Accordingly

You cannot think about building income without paying attention to tax planning. For example, if you would like to turn your $5,000 into $25,000 for the down payment on your next home, you cannot take the $25,000 out the second you hit your mark. You will owe a large sum of the money to the IRS, and your profits could be cut to a point much lower than what you need for your down payment. Ask an accountant about the tax burden of changes you make to your mutual fund long before deciding the change is appropriate.

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