How To Use Mutual Funds For Retirement Planning For Christian Millennials.

Estimated reading time: 10 minutes

Now that we talked about different investment vehicles for retirement planning, I wanted us to dissect the different investments that we talked about. And as part of a series, I figured we might as well start with mutual funds. How can you as a Christian Millennial, use mutual funds for retirement planning? What are mutual funds? And what are the benefits of using mutual funds for retirement planning? So let’s get started.

Table of Contents

• What are mutual funds?
• Benefits of investing in mutual funds for retirement.
• How are mutual funds priced?
• How are returns from mutual funds calculated?
• Types of mutual funds to consider when planning for retirement.
  • Stock funds.
  • Bond funds as a form of retirement planning.
  • How does a bond fund work?
  • Index funds
• How an Index Fund Works
  • Balanced funds.
  • Balanced fund is a type of mutual fund for retirement that contains a component of stocks and bonds. It gives investors a basket of securities to invest in. The asset allocation of stocks and bonds is usually fixed. The aim of the fund is to bring balance as it is a mixture of growth and income.
• Elements of a Balanced Fund Portfolio
  • Equity Component
  • Bond Component
• Advantages of Balanced Funds
• Disadvantages of Balanced Funds
• Conclusion

What are mutual funds?

Mutual funds are financial vehicles that pool assets from investors to invest in securities like bonds, stocks, money market instruments, and other assets. In simpler terms, mutual funds help investors to pool their money together and invest in something. These investors all have a common objective and the professionals managing the funds invest based on the objective. Therefore if the investors want to invest in growth stocks, then the name will be a growth fund.

First Name

Email address:

I have read and agree to the terms & conditions

Leave this field empty if you’re human:

The beauty of mutual funds is that they help in diversification and allow you and me to invest in different stocks using a portion of our funds. The goal of mutual funds is to share the profits and gains based on our contribution margin. That our funds are professionally managed does not hurt as well.

The fund managers track the fund performance as the change in the total market cap, which is achieved by aggregating the performance of the underlying securities. Market cap (capitalization) is the total market value of a company’s outstanding shares of stock. The fund manager (manages the mutual fund) is obligated to work in the best interests of the mutual fund shareholders (the investors)

Benefits of investing in mutual funds for retirement.

Invest a tiny amount consistently. This means that regardless of your net worth, you have the opportunity to invest a small amount and have fund managers invest for you. This also means that you will have saved up and invested a large amount in the long run. The benefit of this kind of method of investing is that you get to experience dollar cost averaging which helps to cushion the investor ((you) from the impact of market volatility.

There is the aspect of diversification. This means that you get to invest in a variety of securities which helps protect you from economic downturns in a specific industry, Diversification is a form of hedging. Because of diversification there is a high chance that even when one industry is doing bad the losses can be offset from the one that is doing good.

Professional fund managers manage these funds. This manager decides how to invest your money, based on a good deal of research and an overall strategy for making money. The software, technical know-how, and research help ensure they act in your best interest based on the conclusion from the market research.

How are mutual funds priced?

The value of a mutual fund depends on the performance of the securities in which it invests. So when buying a unit or share, you buy a part of the portfolio value. The difference between buying a mutual fund share and a single stock is that with mutual funds you have no voting rights. And again there are different stocks in a mutual fund.

The price of a mutual fund share is called the net asset value (NAV) and, on a per-share basis, it is called the net asset value per share (NAVPS). You get this figure by dividing the total value of securities in a portfolio by the total amount of shares outstanding (held by you and me and all the other parties involved like institutions etc.). You can purchase or redeem mutual fund shares at the current NAV. Unlike stock prices, NAV does not fluctuate. Rather, it is settled at the end of the day. (between 4 &6 pm EST)

How are returns from mutual funds calculated?

When you invest in a mutual fund, you are buying partial ownership of the mutual fund and its assets. And you earn a return in these 3 ways

• From the dividends (the company’s earnings distribution to shareholders determined by the board of directors) on stocks and bonds held in the fund’s portfolio. This occurs in the form of distribution and you can decide to reinvest in the mutual fund or get a cheque.
• When there is a capital gain (that is the fund sells securities that have increased in price), the fund passes it on to investors or shareholders (you and me) in the form of a distribution.
• When the fund shares increase, you can sell your mutual fund shares for a profit in the market.

When researching the return of a fund, you will see either the total return or a change in value (going up or down) over a specified period. The total return is calculated in a period of one, five, and ten years.

Types of mutual funds to consider when planning for retirement.

Stock funds.

These funds typically invest in equity or stocks. They can choose to invest in small-sized companies, mid-sized or large-cap companies. The fund managers can also invest based on the different investments approach like aggressive growth, income-oriented, and value among others. We can also categorize them as investing in domestic or foreign equities.

The benefit of this type of fund is that they have a higher earning potential than the rest. Through dividends, they can cushion your funds when the prices of shares go down. This means you can use the money you get from the dividends for reinvestment or you can cash out.

The disadvantages of stock funds are that prices can fall dramatically and there is no guaranteed return.

Bond funds as a form of retirement planning.

Bond funds are the best and most successful portfolios for retirement planning. Bonds are debt instruments that are issued by government or institutions when they are looking to raise money. What happens is that you as the issuer loans either the government or corporation money. And in turn you receive interest payments in addition to the principal amount. This means that through interest payments you get to earn a steady source of income. This makes it appealing for retirement planning.

Bond funds are less volatile making it appealing for retirees looking for capital preservation.

Bond funds makes it easy for small investors to access the fixed income markets. This means that you can put in as little as $100

The benefit of bond funds is that you are less likely to lose money than stocks. Also, the regular interest payments make it a steady source of income.

The drawbacks to bond funds are that they have higher management fees, the uncertainty created by tax bills, and exposure to interest rate changes.

Types of bond funds.

• US government bond funds
• municipal bond funds
• corporate bond funds
• mortgage-backed securities (MBS) funds
• high-yield bond funds
• emerging market bond funds
• and global bond funds.

How does a bond fund work?

After the polling of funds (ie you investing) the fund manager uses the funds to invest in bonds. And their main objective is to look for bonds that have a high credit rating. They also look for bonds with the highest income potential and lowest risk of default. With the source of income being capital appreciation and dividends.

Index funds

Anndex fund is a type of mutual fund that aims at matching or mimicking a market index like the S&P 500. These funds provide broad market exposure, have low operating expenses since they are mostly passive but they also have a lower profit margin than the actively managed funds.

These types of funds always follow the benchmark index regardless of the market condition. They are considered the best portfolio holdings for retirement accounts like IRA and 401(k)

How an Index Fund Works

Index funds are a form of investment that follow a benchmark like the S&P 500 or Nasdaq 100.

Invest money in an index fund. That money is then used to invest in the stocks found in that index fund. This brings about diversification. Now the goal for this type of fund is to mimick the pattern of the market index in this case S&P 500. And in doing so it will match its performance. Since market index generally have a good performance track record, they offer a somewhat reliable return.

The portfolios of index funds only change when their benchmark index change. If the fund is using a weighted index the managers may periodically rebalance the percentage of different securities to balance the weight present in the portfolio.

There are different types of index funds

1. Robo aadvisers.
2. Sepf managed
3. Traditional index funds.

The benefits of index funds are

• Lower risk through diversification
• Low expense ratios
• Strong long-term returns
• Ideal for passive, buy-and-hold investors
• Lower taxes for investors

The disadvantages are

• Vulnerable to market swings and crashes
• Lack of flexibility
• No human element
• Limited gains

Balanced funds.

Balanced fund is a type of mutual fund for retirement that contains a component of stocks and bonds. It gives investors a basket of securities to invest in. The asset allocation of stocks and bonds is usually fixed. The aim of the fund is to bring balance as it is a mixture of growth and income.

The objective of this fund is to provide security, capital appreciation and income for investors who have a low tolerance of risk. This can be ideal for retirement planning.

Elements of a Balanced Fund Portfolio

Retirees or investors with low-risk tolerance can utilize balanced funds for healthy growth and supplemental income. The elements of balanced funds include a mixture of stocks and bonds.

Equity Component

The eequity component helps to ensure the long term preservation of the capital invested. The equity holding leans towards large equities found in the S&P index. They can also include dividend paying stocks.

Companies that consistently pay dividends over the long term tend to be well-established and profitable.

Bond Component

The bond component of a balanced fund serves two purposes.

1. Creates an income stream
2. Balances the portfolio volatility found in the equity component due to market fluctuations.

Investment grade bonds which include AAA corporate debt and US treasuries provide interest income through semi annual payments while large company stocks offer quarterly dividend payout which increases the yield from the portfolio. These income streams can be sued by retirees to supplement their pensions.

Although they trade daily highly graded bonds and treasuries don’t experience the volatility that equities experience. This means that in the event of price volatility on the equities side the bonds can smooth out and balance out the volatility giving stability and security.

Advantages of Balanced Funds

Balanced funds rarely have to change their mix of stocks and bonds and therefore they tend to have lower total expense ratios (ERs), which represent the cost of the fund.

Because they automatically spread an investor’s money across a variety of types of stocks, market risk is minimized when some stocks or sectors underperform.

Balanced funds allow investors to withdraw money periodically without upsetting the asset allocation.

Disadvantages of Balanced Funds

The fund controls the asset allocation, not the investor, which might not match an investor’s tax-planning strategy. Many investors prefer to keep income producing securities in tax – advantaged accounts and growth stocks in taxable ones. It is however difficult to separate the two in a balanced account.

Also, investors can’t use a bond laddering strategy—buying bonds with staggered maturity dates—to adjust cash flows and repayment of principal according to their financial situation.

The characteristic allocation of a balanced fund—usually 60% equities, 40% bonds—may not always suit an investor’s financial goals since needs and preferences can change over time. Some balanced funds play it too safe, avoiding international or outside-the-mainstream markets, which can hobble their returns.

• The Ultimate Guide to Having a Retirement Plan in Your 30s
• The 6 biggest financial mistakes Christian millennials should avoid now!
• A Complete Guide On Emergency Fund For Christian Millennials.
• Stock-Taking. How To Do It And Why It Is Important!
• HOW TO MANAGE YOUR FINANCES. ( 7 KEYS FOR CHRISTIAN MILLENNIALS).

Conclusion

When it comes to investing in mutual funds for retirement, it is imperative that you seek financial advice. Also ask as many questions as possible during the meeting to esnude that the fund is specific to your needs and brings the most benefit to you. Understanding your risk appetite is key as well. Knowing your risk appetite will give you an idea of all the places you can invest your funds. And considering this is for retirement, you should not play with the funds. Instead you should ensure that you invest in securities that give you the lowest risk and higher returns.

Having income streams from the same fund should also be something you consider. Will you be okay receiving the dividends quarterly or do you prefer semi annual interest payments or do you want both?

Is why having a financial advisor is imperative. They will give you all the available options and make recommendation based on the your individual situation. You should never take general advise and apply it to your individual situation as it could lead to you losing your hard earned money. And lastly remember investing now is the key to enjoying your sunset years. Start planning for retirement as early as possible.