You want a much larger annual return on your investment but with low risk. Your goal is to maintain a comfortable life style whether the market goes up or the market goes down.
A excellent IRA investment option is a Mutual Fund — the common name for an open-end investment company. Like other types of investment companies, mutual funds pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds issue redeemable shares that investors purchase directly from the fund or through a broker for the fund.
Including an IRA investment as part of your portfolio, you want a mutual fund to meet certain conditions such as:
1) Return over long-term (5 years) should be above the average CD yields. An example would be a mutual fund that provided an 8% average for 2002 through 2006. There is no guarantee of past performance but it can help you assess the fund's fluctuation.
2) Risk should be minimal. The risk ratings of mutual funds range from low to high. Risk is a standard deviation of the return on total investment.
3) Distribution of income and/or capital gains that the mutual fund gives its shareholders should be large. All distribution should be reinvested which increases the number of shares owned. Taking this action allows you not to be taxed for the income or capital gains received. You acquire additional shares of the mutual fund at a lower net asset value price because the share price is reduced by the amount of distribution.
4) Total Expense ratio should be low or should not exceed the average of other mutual funds serving the same investment classification. The total expense ratio is the fund's total annual operating expenses which includes management fees, distribution (12b-1) fees, and other expenses is expressed as a percentage of average net assets.
On September 15, 2006, $10,000 was hypothetically invested among four mutual funds that fill the above qualifications. Here are the current results.
Investment as of September 15, 2006:
• $2,000.00 (114.92 shares) Balanced
• $2,500.00 (89.22 shares) Equity Income
• $2,500.00 (139.60 shares) Multi-Cap Core
• $3,000.00 (20.19 shares) Speciality: Health
• $9,843.08 (actual total investment -1.56%) shares purchased after initial fees
As of May 11, 2007, the total return on these funds is $11,201.51 11.20%. The combined total return includes income and capital gains that were distributed by these mutual funds. If the distribution was not made and not reinvested, the total return would be $10,595.56 5.96%.
Mutual funds are not guaranteed or insured by the FDIC or any other government agency — even if you buy through a bank and the fund carries the bank's name. There is no guarantee of past performance and always contact the mutual fund and read the prospectus before making an investment.
Mutual Interest Data Service http://www.largedividends.com was created September 26, 1999. The objective is to be an exclusive resource based on finding top mutual funds that 1) distribute large income/capital gains and 2) maintain performance growth for a 5 year period. To validate this niche, the above mutual funds model was created. You can see the actual distribution and reinvestment for these investments at www.largedividends.com.