Beginners Guide to Understanding Mutual Funds

A mutual fund allows you to invest in a basket of individual stocks or bonds with relatively lower risk.

What is a Mutual Fund

A mutual fund is a type of investment in which a group of individuals pool their money to buy a basket of stocks or bonds, that are selected and managed by a professional investment team. When an individual buys a mutual fund share, that money in invested in stocks or bonds held within the mutual fund. Any profit (or loss) made by the fund is periodically distributed to the individual investors.

Why should I invest in Mutual Fund

Mutual funds provides an easy option to diversify across multiple investments for those individuals who are not interested in researching and buying individual stocks or bonds. It is specially handy for those who are new to investing or want hands-off approach. Additionally, you get a professionally managed team that runs the fund based on a specific goal.

How can I buy Mutual Fund?

The easiest way to buy mutual fund is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what mutual fund you are interested, buy and hold them, and sell as per your financial needs.

What are different types of Mutual Funds

There are multiple types of mutual funds, each designed to meet a specific investment goal:

  • Stock Funds – Invest in company stocks from certain industry, country, or region.
  • Bond Funds – Invest in bonds from corporation, government or municipality.
  • Target-Date Funds – Invest in a mix of stocks and bonds targeted for a specific retirement date

What are the advantages of Mutual Funds

Advantages in investing in mutual funds are:

  • Convenience – You can buy or sell funds on any business day
  • Diversification –  You hold a variety of stocks/bonds at a lower risk and lower cost than individual ones
  • Periodic Returns – A fund may provide periodic profit on your investment
  • Professional Management – A professional team will manage individual stocks/bonds within the fund

What are the disadvantages of mutual funds

You will be paying a fee to the professional team that manages the fund which may impact the overall return on your investment. Additionally, you will have no control over the individual stocks or bonds within the fund. Remember, mutual funds are not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.

How do I manage risk of investing in mutual funds

There are multiple options to lower risk of mutual investing:

  • Buy funds that are rated high quality
  • Buy funds of a category that you are familiar with
  • Buy Target-Date funds as per your retirement needs

Final Verdict

Though mutual funds investment is considered safer than individual company stock investment, they do charge fees that may lower expected returns. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

We hope the information in this post will be helpful in your journey of aspiring nirvana!

Helpful Links: https://en.wikipedia.org/wiki/Mutual_fund

Ultimate Guide to understanding Bonds

A bond is simply a loan given to government or corporation in return for interest on the loan.

Bonds

What is a bond?

When a government entity or corporation needs money to grow, it can access that money via multiple options, one of which is by issuing bond. A bond is issued for a fixed timeline, price and interest rate. An entity or individual who buys the bond is called bondholder and is paid interest over the timeline of the bond and gets the principal back at the end of term.

What are different types of Bonds

  • Government Bonds – Issued by federal government
  • Municipal Bonds – Issued by state or local governments
  • Corporate Bonds – Issued by corporations

Why should I buy bonds?

Bonds pay a steady stream of interest payment over their lifetime and return full principal at the end of the term. This enables the bondholder to easily predict the rate of return on their initial investment. Bonds are thus considered safer investment than stocks and reduce overall risk of your investment portfolio. Additionally, interest earned on certain bonds may be tax free thus increasing their overall return.

How can I buy bonds?

The easiest way to buy bond is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what bond funds (Mutual Funds or ETFs)  you are interested, buy and hold them, and sell as per your financial needs.

Is there no risk to owning Bonds?

Bond investing is considered safer than stock investing. However, they also provide lower returns compared to stocks. You will always get fixed return on your investment no matter how well the company may be doing.

In some cases, you may not get timely payments if the borrowing entity is experiencing hardship. In rare cases, you may completely lose your money if borrowing entity declares bankruptcy.

How can I mitigate risk?

There are multiple options to lower risk of bond investing:

  • Buy Index Funds (basket of multiple bonds)
  • Buy Mutual Funds or Exchange Traded Funds ETFs (basket of multiple bonds in one category)
  • Buy bonds that are rated high quality and investment grade

Final Verdict

Bond investment provides stable returns and is thus considered safer than stock investment. However, keep in mind that they provide lower returns than stocks. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

Bonds

Helpful Links:

https://en.wikipedia.org/wiki/Bond_(finance)

Is investing in 401(k) a good idea for Retirement?

A 401k is a retirement plan offered by companies in which the employees contribute part of their salary with employers usually offering matching contribution.

401k

Introduction A 401k is a retirement plan offered by companies to their employees. Employees can contribute part of their salary to the plan, invest in various mutual funds, and let it grow tax-free until withdrawal time. Contributions to 401k are tax-free (up to an annual limit) which will lower your taxes.  On top of that, most companies provide matching contribution.

Pros

  • 401k money grows tax-free until withdraw time post retirement, thus providing better returns compared to taxable account
  • Employer matching contributions are like free money
  • Contributions are automatically deducted from your salary
  • You will probably be in a lower tax bracket when you take money out during retirement

Cons

  • The 401k plan investment choices may have mutual funds with high fees
  • You will eventually pay taxes when you take the money out
  • There are early withdrawal penalties if money is taken out before retirement

I am not sure if I can save part of my salary

What if your employers offers you a 5% raise. Will you ever say No? Never!

That is effectively you are doing by not contributing part of your salary to 401k, assuming your employer matches your contribution. Even if there is no matching, you are still saving money on taxes while securing your retirement.

401k
401k

I am afraid of losing money in stock market

It is a valid concern!  Although no one can predict the future, US stock market has always bounced back after every crash.

Money invested in 401k is for the long-term retirement purpose. There will be short-turn bumps but if you stay the course and not panic, then you will come out a winner in the end.

Additionally, there are various strategies (Ex. Dollar cost averaging) to overcome unique risks to your situation that allows you to invest money in higher or lower risk options.

What happens to my money if I change jobs

When you change your job, you can:

(1) Rollover money from previous employer plan to new employer 401k plan

(2) Rollover money to IRA (Individual Retirement Plan)

Remember, 401k money belongs to you! You have full control over what to do if you change your job.

Action Items to start 401K

  1. Decide what percentage of your salary you can contribute to your 401k
    1. At a minimum, contribute to take full advantage of your company matching
  2. Work with your company HR to set up your 401k Account
  3. Select which mutual funds to invest in
    1. Start by investing in target-date funds as they choose allocation per your retirement age
    2. As you get comfortable, you may want to invest in a mix of Index Funds and Bond Funds
  4. Set up to automatically deduct money from you salary

That’s it! Sit back, relax and watch your money grow over time!

Final Verdict

For salaried people, contributing money to 401k account is one of the best way to save for retirement, get free-money from employers, reduce taxes and comfortably save for retirement.

The key is to start early, contribute regularly and let your money grow over time!

401k

We hope the information in this post will be helpful in your journey of aspiring nirvana!