Is a Stock Mutual Fund a Good Option to Save for College?

Stock mutual funds offer a diverse way of saving money for college. Although there is evidently some potential risk involved with investing your money in a mutual fund, there is also the opportunity of having those investments pay off in the long run. Schools offering Chartered Financial Analyst (CFA) degrees can also be found in these popular choices.

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Is a Stock Mutual Fund a Good Option?

As a parent, you're likely wondering how you'll pay for your child's tuition. While savings accounts and CDs (certificate of deposit) are always a great option for saving money, there are other avenues you might not have considered. With a stock mutual fund, you'll invest your money like you would with a portfolio but could end up making more. With the chance of earning more money in the long run, though, there are also negative consequences.

What Is a Mutual Fund?

Unlike a personal portfolio, a mutual fund is shared with lots of people, even thousands. There are many kinds of mutual funds, and you should know which ones can benefit long-term savings (like a college fund) and which ones can harm your investment. Before investing in one of these funds, you should check on four things: the average quarterly loss, the standard deviation (lets you know the average ups and downs), the beta (measures the risk) and the annual expense (a percentage of your investment that goes to cover costs).

Why Should I Invest?

The simple answer is because you can get greater returns with a little risk. While even a high-yield savings account can really only give you around one percent interest, some mutual stocks have been known to have high returns, though the average is eight percent. The key to investing in a stock mutual fund is to invest and forget. While the economy goes down, you may be tempted to pull your money out and switch to another stock, but this won't help. What's hot now most likely won't be in coming quarters. Ride out your investment and the economy will improve. Then so will your stock.

Why Shouldn't I Invest?

Again, the simple answer is risk. There are many stocks out there, and with the economy fluctuating so much you may be afraid to put your money into something that could fail. If this sounds like you, your best option is to choose stock that has been around for a while and has remained steady.

Which Should I Invest In?

It's quite easy for someone else to handle your money - just as it's easy for us to tell you to invest thousands for your child's future. The actual doing is much more difficult, which is why you need to do the research. Find out which mutual funds may benefit your family and which you're comfortable with. Some are better than others, and you just need to know the difference.

Value Funds

Why not take the opportunity to invest in a business that has a strong background but isn't exploding on the scene? For one reason or another, the cost for this stock is low (hence the name) and can be bought for a bargain. Because the company is strong, it won't close like a trendy business might. They produce a good return long-term, which is perfect for you. If you're saving for the next 18 years for your baby's education, you've got the time to wait.

Sector Fund

While this fund can be slightly risky, it does have benefits. If you choose a sector (field or area) that you believe will do well over the next ten years, invest most of your stocks in it. Some popular areas you may want to consider include medicine, precious metals, computers and real estate. This is thought to be risky, because you must have at least 25% of your holdings in that sector, which limits your investments. However, with technology constantly evolving and a consistent need for the sector you choose, you'll have little risk.

Growth Funds

These are the bandwagon funds of the stock market. Think of a company that's exploding with revenue and growth but that hasn't been around for very long. That's the company you'd be investing in. And while these flavor-of-the-month stocks reap great returns, the growth of the company can end abruptly. For instance, your business may open an additional nine stores per metropolitan area - only to have the business drop dramatically and close 12 stores per area. Don't fall for this get-rich-quick scheme if you're investing for the future.

Focused Funds

This is quite risky because you'll be putting most or all of your funds into one or a few stocks. The theory is that you'll have more time to research and watch the stock you invested in. If that stock booms, so do you. Of course, this offers very little in diversity (meaning that you're putting all your eggs in one unstable basket) and if your stock crashes - again, so do you.

Now that you understand stock mutual funds, discover some other options. See if a pre-paid tuition plan is right for you.

To continue researching, browse degree options below for course curriculum, prerequisites and financial aid information. Or, learn more about the subject by reading the related articles below:

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