How To Build A Mutual Fund Portfolio For Income: August 2025 Edition

What Are Mutual Funds?

A mutual fund pools money from its shareholders and invests in stocks, bonds or short-term debt. Mutual funds are managed by professional investment advisors who ensure that the fund’s portfolio matches the objectives stated in the fund’s prospectus. Employer-sponsored retirement plans such as 401(k) plans typically invest in mutual funds.

The shares of a mutual fund that are bought by an investor reflect that investor’s partial ownership of the fund and any income the fund may generate. When buying shares of stocks or exchange-traded funds (ETFs), an investor buys them from other investors through an exchange. When buying shares of a mutual fund, an investor buys them either from the fund itself or through a broker.

A mutual fund’s share price, known as its net asset value (NAV), is determined by summing the value of all the assets held in the fund’s portfolio and dividing that number by the total number of shares outstanding. Unlike the price of stocks and ETFs that fluctuate throughout the trading day, the NAV stays the same throughout market hours and is only calculated once each day at the close of trading.

How Do Mutual Funds Work?

Mutual funds return value to investors through:

• Dividend payments: Are derived from the dividend payments of the underlying stocks or from the interest on bonds. Most mutual funds offer investors the choice of reinvesting these payments to buy additional shares of the fund.
• Capital gains distributions: If the price of the stocks contained in a fund’s portfolio increases and the fund sells those stocks, the fund receives a capital gain that it distributes to investors, minus any capital losses.
• Increased NAV: If the market value of a fund’s portfolio increases, the value of each of its shares also increases, and investors can sell their mutual fund shares at a profit. However, if the securities held by a fund go down in value, investors can incur losses.

Mutual funds have several advantages over other types of investments, they:

• Are professionally managed: A mutual fund’s managers select the fund’s holdings and they constantly monitor its performance.
• Are diversified: Because mutual funds invest in a variety of companies or invest across multiple sectors, they have a lower risk profile than other investments; bond funds are diversified by holding bonds from different issuers that have varying maturities.
• Have a low entry point: The low share price of mutual funds allows first-time investors easy entry and makes the purchase of additional shares possible.
• Are liquid: Shares of mutual funds can be sold at the end of any trading day at the current net asset value; redemption fees may also be charged.
• Have a wide variety of offerings: Besides stocks and bonds, mutual funds also hold commodities, real estate and foreign assets that would otherwise not be available to investors.

Mutual funds have several disadvantages compared to other types of investments, they:

• Are more expensive: Mutual funds have higher fees, commissions and expenses than some other types of investments.
• Aren’t FDIC protected: Funds used to buy shares of mutual funds aren’t protected by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits for up to $250,000.
• Have only once a day redemptions: Sales of mutual fund shares​ take place only once a day at the close of the market.
• Can have a lack of transparency: A recent study has shown that retail investors make poor choices when selecting mutual funds because some funds create unnecessarily complex disclosures and fee structures, and obfuscate poor performance.

With inflation running at 3.0%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.

How To Choose The Right Mutual Funds For Income

Determining which mutual fund to buy involves knowing your investment objectives, the kinds of returns you seek, your investment timeframe and your risk tolerance. Once you’ve determined those factors, you can read the prospectuses of various mutual funds to see if they align with your needs. By law, mutual funds must file a prospectus and regular shareholder reports with the SEC. It’s also a good idea to make sure that the investment advisors who manage a fund are registered with the SEC.

There are various types of mutual funds and the SEC requires that at least 80% of a fund’s assets be of the type the fund advertised. The remaining 20% can be of any type. The main types of mutual funds are:

1. Money market funds: By law, money market funds can only invest in high-quality, short-term instruments that are issued by U.S. corporations or by federal, state and local governments; this makes their risks low, and while their returns won’t be high, the principal is guaranteed.
2. Bond funds invest in different types of bonds that have different risk profiles; bond funds usually produce higher returns than money market funds.
3. Stock funds invest in corporate stocks with some mutual funds focusing on small-, mid-, or large-cap companies, companies based outside of the U.S. or companies doing business within a particular sector. The types of stock funds are:

• Growth funds that contain companies showing growth in earnings, sales and cash flow; these companies typically have high PE ratios and don’t pay a dividend.
• Income funds, also known as value funds, contain stocks that pay regular dividends but may not have high growth potential; these companies usually have low PE ratios, low price-to-book (P/B) ratios and high dividend yields.
• Index funds that contain stocks that correspond with a market index, such as the Dow Jones Industrial Average (DJIA) or the S&P 500 (SPDR); these types of funds typically have lower expenses than other types of funds because they require less management.
• Sector funds that contain stocks within a particular industry sector, such as energy, utilities, healthcare or information technology; because companies within a particular sector are usually highly correlated, sector funds can experience high volatility.
• Regional funds that contain companies located in a particular part of the world, whether a region or an individual country.
• Socially responsible funds, also known as ethical funds, contain socially conscious companies such as recycling, solar and wind power or green energy, and they do not invest in companies in the nuclear power, arms, alcohol or tobacco industries.
• Target date funds, also known as lifecycle funds, contain a constantly changing mix of stocks, bonds and other investments that focus on a particular date in the future; these funds typically have a lower risk profile as the target date approaches.

With inflation running at 3.0%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.

How To Build A Mutual Fund Portfolio For Income

Income mutual funds take one of two approaches to investing. The first is to invest in high-dividend stocks that are usually mature businesses that pay out their profits in the form of dividends rather than reinvesting them. These companies tend to be in the industrials, utilities, financials or energy sectors, and during economic slowdowns, these companies may suffer losses.

The other approach involves investing in dividend-growth stocks, which are companies that may not offer high dividends but they have raised their dividends over time. These companies may not be as sensitive to market downturns as the high-dividend companies.

When considering what funds to add to your portfolio, it’s important to consider a fund’s fees, expense ratios or commissions, because they can have a large impact on returns over time. Fees typically include an annual operating fee, also known as an expense ratio, which is a percentage of the funds under management. Expense ratios typically range between 1% and 3%, and while going with a fund charging lower fees may seem like a no-brainer, funds charging higher fees but delivering higher returns may prove the better choice.

Investors may also pay sales fees when they buy shares in a mutual fund, and redemption fees when they sell their shares. Sales fees are referred to as a mutual fund’s load, and some funds charge a load at the time of purchase, while others charge a load when shares are sold. Some funds don’t charge a load at all, and they are referred to as no-load funds.

For fund ideas suited for retirement, check out 9 Best Retirement Income Funds of 2023. It includes such income mutual funds as the Schwab Balanced Fund (SWOBX), the Vanguard Wellington Fund (VWELX), the T. Rowe Price Dividend Growth Fund (PRDGX), the Schwab International Index Fund (SWISX) and the Vanguard Long-Term Tax-Exempt Fund (VWLTX). When evaluating any mutual fund, look at its historical performance then compare it with the performance of the fund’s peers and any benchmarks.

With inflation running at 3.0%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.