Should I put my educational loan into a mutual fund?
Question:I know there are risks with many funds, but I have one that I have invested in for over 10 years that has grown considerably with no loss (it averages 15-24%/yr).
I am taking out 25-30k/yr for two years of school, and I was trying to decide whether I should stick it in an ING orange account (with 4% interest) or risk putting it into my mutual fund where it would grow considerably more (and I have seen no evidence of profit loss).
I was also concerned with how this money would be taxed, as I have only withdrawn from the mutual fund once. I believe you are only taxed on the growth incurred, but if someone more knowledgeable could educate me, that would be great.
I'll answer the tax question first. Mutual funds are taxed EVERY year with regard to the distributions they make. Whether it is capital gains distributions (from stock sales made by the fund that year) or dividends, you should be receiving a 1099 form at the end of each year for all funds in non-retirement accounts, which details all distributions made to you. You owe taxes on these EVEN IF you reinvested them to buy more shares.
In addition, you'll owe capital gains taxes in the year you sold any shares, if the shares had any capital appreciation.
That said, you should definitely NOT invest your student loan $$ in a mutual fund - go with ING. No matter how great the fund is, there is ALWAYS the risk of a market downturn, and you may not have enough time to recoup such a loss.
If you don't need all the money, you should not be borrowing it to begin with - just reduce the amount of your loan. Trust me - I maxed out my student loans and graduated in 2000, and I'm STILL bearing that cross.
My final point is a question for you - you say your fund has gone the last 10 years without a down year, and has averaged over 15% per year? Please tell me what fund it is, so I can get into it!!
I hope that helps.
do it. some risk..rewards
no risk..guaranteed no rewards.
you only live once.
Be careful investing your student loan. Granted if your mutual fund continues its growth you'll make some good return on the investment, but if you lose money you still have to pay your loan back. You wouldn't want to stick it in a 4% return rate account since you'd lose money (earning 4% but paying 6.8% on your student loan). It might be beneficial to take the money you don't need and make an early payment on your loan to decrease your principle. Guess it's your choice...
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