While putting money in a savings account is great, truly investing money can be a better strategy for growing wealth in the long term. For those who are ready to transition from saving to investing but are beginners, mutual funds offer a great starting point. As with any investment, you should be sure to calculate how much your investment can make over time to see if it's the right move. When you understand a few mutual fund basics, you can easily come up with these figures and make adjustments as needed.
What is a Mutual Fund?
Before you can know how much money you can make with a mutual fund, you should first know what these funds are and how they work. While there are many different types of mutual funds, they all operate on the same basic principle. Many investors, including yourself, put money into the fund. Then, a professional manages the money and invests it in a variety of ways. One fund may invest in thousands of stocks and bonds or just a few, depending on the money invested and the manager. Many 401(k) plans include mutual funds. You can also invest in a mutual fund through brokerages or directly through mutual fund companies.
Initial Investment and Monthly Contributions
Once you have found a mutual fund in which you want to invest, you can start your calculations. First, decide how much you want your initial investment to be. Some brokers and mutual fund companies have minimums between $500 and $3,000. Be sure to check what the minimum is for your desired fund. You shouldn't jeopardize your other finances in order to make your investment. Then, it's important to decide how much you will send to your mutual fund monthly. Consult your monthly budget and see what makes sense. Remember that you can adjust this figure over time as things change.
Time of Investment
Next, you must determine how long you want to invest in the fund. If you know you're saving for a certain event, like a child's college education or your retirement, you can set the time to coordinate with that event. If you're just testing the waters to see if mutual funds are right for you, you can calculate the return for five or 10 years of investments.
Expected Rate of Return
The final major piece of the puzzle is the expected rate of return. As the name suggests, this number is not set in stone. However, you can use it as a good rule of thumb for planning. Brokerages and mutual fund companies can provide this figure for the fund you want.
Use an Online Calculator
Once you have each of the important figures written down, you can make your calculations and adjust as needed. The easiest way to ensure accuracy is to use an online calculator. Many mutual fund companies and investment blogs have calculators that you can use for free. If you like the number you see, you can keep your figures where they are. If not, you can always select a different fund, try a larger monthly contribution or extend the length of the investment.
Items you will need
- Financial calculator
- How to Read a Mutual Fund Performance Chart
- Balanced Fund vs. Independent Stock & Bond Funds
- How to Open an IRA Account With a Low Expense Ratio
- Mutual Fund Secrets
- How Do I Understand an Annual Mutual Fund Statement?
- What Determines Whether the Price of a Mutual Fund Goes Up?
- How to Select the Best Mutual Fund
- How to Calculate Growth Rate in Dividends