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Mutual Fund

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio's value. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding. That's why the price of a mutual fund share is referred to as the net asset value (NAV) per share, sometimes expressed as NAVPS. A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding. Outstanding shares are those held by all shareholders, institutional investors, and company officers or insiders. Mutual fund shares can typically be purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—doesn't fluctuate during market hours, but it is settled at the end of each trading day. A mutual fund is both an investment and an actual company. This dual nature may seem strange, but it is no different from how a share of AAPL is a representation of Apple Inc. When an investor buys Apple stock, he is buying partial ownership of the company and its assets. Similarly, a mutual fund investor is buying partial ownership of the mutual fund company and its assets. The difference is that Apple is in the business of making innovative devices and tablets, while a mutual fund company is in the business of making investments. If a mutual fund is construed as a virtual company, its CEO is the fund manager, sometimes called its investment adviser. The fund manager is hired by a board of directors and is legally obligated to work in the best interest of mutual fund shareholders. Most fund managers are also owners of the fund. There are very few other employees in a mutual fund company. The investment adviser or fund manager may employ some analysts to help pick investments or perform market research. A fund accountant is kept on staff to calculate the fund's NAV, the daily value of the portfolio that determines if share prices go up or down. Mutual funds need to have a compliance officer or two, and probably an attorney, to keep up with government regulations. Most mutual funds are part of a much larger investment company; the biggest have hundreds of separate mutual funds.

Traditional IRA

An IRA (Individual Retirement Account) is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. First, you invest the money in the account. You can invest in stocks, bonds and other assets. These are called contributions. Contributions to traditional IRAs are often tax-deductible. For example, contributing $6,000 to a traditional IRA could reduce the amount of your taxable income by $6,000. Furthermore, when you make those contributions, are you don't pay any taxes. Any earnings that you get from investments (stocks, bonds, etc.) in the account can potentially be tax-deferred (you pay them when you withdraw). You pay all the taxes when you withdraw the money (treated as income) from the IRA when you retire starting at age 59.5. This is why you contribute to a traditional IRA as opposed to a Roth IRA if you think you'll earn less money in retirement than now. If you're gonna earn less money when you withdraw from the IRA during retirement, your tax bill won't be as high since you'd be in a lower tax bracket at the time of retirement. Almost anyone can contribute to a traditional IRA, provided you (or your spouse) receive taxable income and you are under age 70 ½. But your contributions are tax deductible (like the $6,000 example above) only if you meet certain qualifications. If you are under 59 ½: If you withdraw any money from a traditional IRA, you'll be slapped with a 10% penalty on the amount you withdraw. That's in addition to the regular income tax you'll owe on your withdrawal. It's also important to note that there are a few situations in which you can withdraw from your IRA early. One common exception is the ability to withdraw up to $10,000 to be used toward a first-time home purchase for you or a loved one. Also, you can withdraw any amount at any time for qualified higher-education expenses, so an IRA can effectively double as a college savings account. If you're older than 59.5, you can make penalty-free withdrawals since that's considered retirement age. This is when you pay the taxes deferred on investment gains as well as contributions. The contribution limit for traditional IRAs in 2020 and 2021 is $6,000 per year. People 50 and older can contribute up to $7,000 per year. This is the IRS's way of encouraging you to save more in the final years before retirement. You should aim to put as much in an IRA as the government allows you to. That's because the more you save in a tax-favored account, the more tax-protected gains you can rack up.

Roth IRA

Contributions to this IRA are not tax deductible, but their investment growth is not taxed (in a traditional IRA, it's deferred) while the money is in the account. As opposed to a traditional IRA, the contributions in a Roth IRA are taxed when you put them in the account. It's only tax-free when you withdraw during retirement. It's exactly the opposite of a traditional IRA. So the biggest difference between how the two main types of IRA work is when you get the tax benefit -- now (traditional) or later (Roth). If you think you'll earn more money in retirement than now, contribute to a Roth IRA to reduce your tax liability when you're older. While almost anyone with earned income can contribute to a traditional IRA, there are income limits for contributing to a Roth IRA. Not everyone can take advantage of them. So if you make a lot of income, you may not contribute to a Roth IRA. In 2021 the contribution limit is $6,000 ($7,000 if 50 or older) per year for modified adjusted gross incomes below $140,000 (single filers) or $208,000 (married filing jointly). Roth IRAs offer a bit more flexibility when withdrawing money before retirement age. If you're under 59.5 years old, you may generally withdraw your contributions to a Roth penalty-free at any time for any reason, as long as you don't withdraw any earnings/gains on your investments (as opposed to the amount you put in) or dollars converted from a traditional IRA before age 59 ½. In that case, you'll get hit with that same 10% penalty. If you're 59 ½ or older: You can usually make penalty-free withdrawals (known as "qualified distributions") from any IRA. To make qualified distributions from a Roth IRA, you must be at least 59½ and it must be at least five years since you first began contributing. And if you converted a regular IRA to a Roth IRA, you can't take out the money penalty-free until at least five years after the conversion.

How mutual fund earn money

Investors typically earn a return from a mutual fund in three ways: 1) Income is earned from dividends on stocks and interest on bonds held in the fund's portfolio. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 2) Funds often give investors a choice either to receive a check for distributions or to reinvest the earnings and get more shares. 2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 3) If fund's securities increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit in the market.