There are many
ways that one mutual fund can make money, the some total
is reflected in the yearly total percentage return.
- Increase in the Net Asset Value or price
per share for a mutual fund
- Capital gains and dividend distributions
- Compounded interest
- Dollar Cost Averaging
Net Asset Value goes up and down daily. When you buy or
sell a mutual fund the price you get is the closing price
at the day's market close. The more the mutual fund is purchased
the higher the net asset value will go. If you have good
funds, the net asset value will increase most years.
Capital Gains and Dividend are paid on profits from your
mutual fund. These are paid either quarterly, semi-annually,
or yearly. Know your payout dates so that you don't sell
a fund right before a major payout into your account.
Compounded Interest is the way interest is paid on mutual
funds. This means interest is paid on previous principal
and interest, not just the principal. Therefore you get interest
paid on interest, over and over again. Compounded interest
gives you a distinct advantage over simple interest savings
account. Use our compounded interest savings calculator.
Dollar Cost Averaging is simply making monthly payments
into your mutual fund. Making monthly payments into your
mutual fund you will occasionally hit the net asset value
when it is down, when it goes back up you can gain an increase
in value. Historical statistics have shown dollar cost averaging
into a mutual fund can leave you with a slightly higher account
value than with one lump sum investment. In some cases, dollar
cost averaging will produce a significant increase in your
mutual funds value.
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