How do mutual funds make money? It is a question I get asked often. Therefore, today I’ll give you a simple explanation that will help you understand.
1. A mutual fund is made of anywhere between 40-250 stocks of different companies you know. Companies like Apple, Home Depot, T-mobile, etc. The stocks of these individual companies are put into one “basket” aka a fund. It is called a “mutual fund” because you and I and many others “mutually” put in our money to buy these individual stocks. The small investor can not afford to buy all those stocks by themselves. Therefore by “mutually” pooling our money we have the leverage to buy many companies in one basket.
2. The stocks in those companies represent ownership in those companies. Therefore when you own a mutual fund you have a very small percentage in every company in that fund.
3. The mutual fund make money basically in three ways:
The individual stocks in the fund make a profit and pay it to you in the form of a dividend. In other words you get a piece of the profits of the companies in your fund.
Another way you make money is by getting a capital gains within the fund. For example, let's say the fund had Apple stock that it bought at $50 and in that year the Apple stock went up to $100. Then it sold the Apple stock for a profit of $50. Those $50 dollars would be distributed among all of the mutual fund share holders.
A third way a fund makes money is the fact that the share of the fund itself can increase. If you bought a fund at $60 and it is now trading at $70 you have increased the worth your fund by $10.
4. The recommendation is to always reinvest the dividends and the capital gains in order to accumulate more shares of the funds. Reinvesting both is key to explosive growth in your funds how you can achieve double digit interest rate growth.
5. Mutual funds can be beneficial even in a down market. No matter how bad the market there will be companies within your funds that will pay a dividend, capital gain or both even in a down year. Even though the overall price of the fund is down those reinvested dividends and capital gains can buy you more shares because the overall price of the fund is lower.
“The LORD will open to you His good treasure, the heavens, to give the rain to your land in its season, and to bless all the work of your hand. You shall lend to many nations, but you shall not borrow.” (Deuteronomy 28:12 NKJV)
When you have a mutual fund you are an investor and not a borrower. That is the position God has promised in His word.
If you have questions don’t hesitate to ask here. Take charge of your money!
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P.S. Day 343 please pray for the 7.2 million goal for 2020