Not too long ago, we wrote a post about good investments for generating passive income, and mentioned the idea of mutual funds in the process.
A mutual fund can essentially track all major U.S. stocks in a strategically diversified fashion designed to benefit a large pool of investors rather than any particular individual. It’s not a guarantee or a foolproof investment concept (no such thing exists), but it can be more reliable than some alternatives as a means of generating passive income.
Keeping that in mind, here are a few tips for how to select the right fund for your purposes.
Find A Cheap, Broad Fund
This is something we addressed in the aforementioned post, but it’s worth reiterating. The example, there was the Vanguard 500, because it’s a mutual fund that tracks the S&P 500 (a fairly comprehensive selection of the major U.S. stocks) and it has a very low expense ratio.
This is the best of both worlds as a concept for a mutual fund that can generate passive income. It’s designed to succeed and it demands relatively little capital from you in terms of commissions or fees. The Vanguard 500 is not alone in meeting these desires, but for those reasons it’s a good example.
Make Sure You Can Receive Regular Income
Mutual funds are structured in different ways, and while you can always withdraw your investment at your leisure, you can’t always direct earnings as easily or automatically as you may imagine.
As one write-up of the basics put it, mutual funds can be classified as growth-oriented or income-oriented. With the former, gains on your investment are generally reinvested so as to compound your long-term earning potential. The latter, however, focuses more on passive income, and essentially funnels your gains back to you. When choosing a fund it’s important to make sure that the income-oriented approach is an option.
Research The Fund’s History
It stands to reason that anyone looking into mutual fund investment ought to investigate the past history of any relevant fund. However, one list of tips for evaluating mutual funds took this idea a step further, suggesting that investors look behind the numbers to make sure that history is a good indication of potential. It could be, for instance, that a fund with a strong history was recently transferred to a new manager, which doesn’t necessarily mean it won’t succeed, but which means the manager responsible for the good reputation is no longer involved.
Mind The Taxes
Finally, you can’t forget about the taxes. Depending on the setup of the fund, you may be responsible for reporting the fund’s capital gains on your own tax return (rather than simply your own gains), and you’ll also need to record whatever passive income you take out along the way. This isn’t something that varies too much from one fund to another, but it’s something to keep in mind as you approach this sort of investment in general.
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