A Skinny on Mutual Funds for Millennials

While millennials enjoy a luxurious lifestyle and want the finest of everything, they’re a little conservative with investing their money. According to a study by UBS, this generation is a risk averse due to significant factors. Firstly, due to fast growing technology that has put everything on the fingertips, and secondly and largely due to the global economic crunch that dismantled a lot their parent’s investments, savings, properties and other funds along with their own job prospects.

Since Millennials have experienced the most economic turmoil as compared to other generations, they’re naturally risk-averse. However, this certainly doesn’t mean that if you as a millennial shouldn’t invest, and you have no options.

What are Mutual Funds?

Talking about safe investments, mutual funds are a great tool for long term savings. Mutual funds are given out by the U.S Security Exchange Commission. It’s a useful financial instrument to diversify your investments. When you buy a mutual fund, you buy a portion of a basket with multiple thing that include stocks, bonds, etc. The value of mutual funds is directly proportional to the value of the contents in the investment basket.

What are Mutual Funds?

How can you make money from mutual funds?

A mutual fund helps you save and make some money in the following ways:

  1. You receive dividends on stocks and earn from interest on bonds. Mostly, companies pay out dividends at the end of each year. The fund collects income all year round and distributes it at year end to you.
  2. If the prices of contents in your fund have increased, the fund gets a capital gain. That profit it also distributed to you (investor) as part of distribution.
  3. You also earn when the value of your fund increases (e.g. increase in share price), you can sell off your shares for that increased price and earn profit. For e.g. if you bought 100 shares for a dollar each, and the new price is 2 dollars, you earn 100% profit on each share if you sell it.

Common Types of Mutual Funds

Today, there are thousands of mutual funds out there; so there’s something for everyone. However, here are the seven basic types of mutual funds that you can buy to diversify your investment bag:

  1. Money Market Funds — short term safe investment, with lower yield. These typically include T-bills, government bonds, commercial paper, and certificates of deposit.
  2. Fixed income Funds — fixed rate of return like various government bonds. They aim to bring in money regularly at fixed intervals.
  3. Equity funds — they tend to grow faster than the previous two types mentioned above. They are also riskier as equity funds invest in stocks. These funds also have sub categories like large-cap, mid-cap, small-cap stock, etc.
  4. Balanced Funds — They aim to yield higher returns through a balanced combination of different funds, and to minimize losses too. More risk averse investors use a higher number of fixed income securities and lower number of pure equity funds to control losses.
  5. Specialty Funds — these focus on commodities, real estate or companies that serve a purpose. A socially responsible fund will invest in a company that works to make more ecofriendly.
  6. Funds of Funds – another type of balanced funds, they aim to diversify assets and make investment easy.

If you want to ensure safe investments, mutual funds are a great tool. Diversification helps minimize your chances of losing your money. If you feel you’re not that experienced with managing your investments, it’s wise to speak with an advisor who specializes in investment management services. Invest today, so you can create a financial cushion that will protect you from monetary issues at the time of retirement.

Learn more about mutual funds and everything you need to know about wealth management from Christopher Nolt owner of Solid Rock Wealth Management. Chris Nolt has been a financial advisor since 1989. With Chris’ financial planning services, you can make smart decisions with your money and make sure that you live a life fully financially secured.