You can draw monthly income from a mutual fund. Check a mutual fund's policy on monthly redemptions before investing your money. It's important that you realize that taking money out of a fund isn't as easy as taking money out of a bank. Yes, it is your money, but you have to play by the mutual fund's rules. Before you set up monthly redemptions, understand the rules and how they will affect your cash flow.
Delays in Receiving Funds
When you redeem shares from your mutual fund, the transaction occurs on the next business day. For example, if you redeem shares on Thursday, you will see the redemption on Friday. It can take an additional one to two business days to transfer the money to your bank account, depending on your bank's policy on receiving electronic transfers. On top of all of those delays, if you bought your fund through a broker, the broker may add one to three days of waiting time before your funds are available. In other words, set up your monthly withdrawal to occur as much as seven days ahead of when you need the cash.
You can avoid calling your mutual fund every month to redeem shares. Instead, you can fill out an application for systematic withdrawals. Indicate how much money you want each month, and the mutual fund manager will sell enough shares to make sure you get that amount. You can also designate a specific number of shares you would like to sell each month. This can cause your monthly income to vary because shares will have a different dollar value each month.
Monthly redemptions aren't free. You have to pay a fee to the mutual fund for handling the transaction. Each fund sets its own fees, but the Securities and Exchange Commission sets a limit on redemption fees of 2 percent. That means you pay 2 percent of the amount you want to withdraw each month. You don't pay 2 percent of the total value of your money that is in the fund.
Dividends and Capital Gains
Mutual funds set their own payout dates for dividends and mutual funds. If you pay attention to these dates, you may be able to skip a redemption for the months where you receive dividends and capital gains. This can save you redemption fees and prevent having to sell shares. Read your mutual fund prospectus to see when you receive dividends and capital gains. Make sure these payouts are enough to replace your monthly redemption before you cancel a redemption for any given month.
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