Generating a significant annual income from mutual funds requires investing an impressive amount. Most people have to scrimp and save their whole careers to build a portfolio that can generate enough income to replace their day job by the time retirement comes around. Even if you don't have millions of dollars ready to invest right now, you might get there someday. Daydreaming and planning ahead can't hurt, so go ahead and estimate how much income you could get from a portfolio.
Find the mutual fund’s history of distributions. Make note of what frequency the fund pays out -- most growth funds make quarterly distributions, while fixed-income funds typically make monthly payments. This information is in the fund’s prospectus, but you might also find it through your brokerage’s reports.
Record the average amount of past distributions. Funds that make distributions of consistent amounts will provide more predictable annual income than those that make widely varying distributions.
Multiply the average amount of the fund’s distributions by the number of shares you own. Record the result as your estimated periodic payment. For example, if the fund pays an average of $0.50 per share and you have 1,000 shares, it will pay $500 per distribution.
Multiply your periodic payment by the number of periods in the year to calculate your estimated annual income. For example, if the mutual fund pays out every month, you would multiply by 12, or an estimated $6,000 for the year on 1,000 shares.
Divide the amount of income you’re looking to have by the number of distributions per year if you're planning an investment or for retirement and don’t currently own shares. For example, if you want $60,000 per year from a fund that pays monthly, you need $5,000 per month.
Divide the amount per period by the average amount of the fund’s periodic distribution to calculate the number of shares you would need to own. For example, if the fund pays $0.05 per share, you need 100,000 shares to have a $60,000 yearly income from the mutual fund.
Multiply the number of shares you need by the mutual fund’s trading price for the size of investment you’ll need to make to secure that income. If you need 10,000 shares and the mutual fund is trading for $10.47, you’ll need $1,047,000 to secure the income you want.
- Franklin Templeton: Fixed Income Funds
- Stanford University: Why, When, and How Do Mutual Funds Pay Distributions?
- Brigham Young University: Calculate Mutual Fund Returns
- IRS. "Mutual Funds (Costs, Distributions, etc.)." Accessed June 28, 2020.
- U.S. Securities and Exchange Commission. "Net Asset Value." Accessed June 28, 2020.
- U.S. Securities and Exchange Commission. "Wash Sales." Accessed June 28, 2020
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.