The income on mutual funds can be distributed to its shareholders in two different ways:
• A shareholder of the fund can get paid directly where the earning of the shareholder enters the pocket directly.
• The shareholder can opt for the purchase of the additional bonds and share of the fund by reinvesting the money earned in form of dividends.
Whether a person in picking up the amount of the money as hard cash or he/she is reinvesting the same for purchasing more shares; the investor is actually benefitted. As a matter of fact, reinvestment can be looked upon as building up nest for the retirement egg. This means that the person can actually enjoy the earnings when he or she retires.
However, the income of mutual funds is never a guaranteed one. This is simply because, there are several risk factors and if anyone of the several risks (associated with mutual funds) comes to the forefront, the income on mutual funds can tumble down. This can be an outcome of any of the risk factors like the currency risk, country risk, interest risk, inflation risk etc.
For those who are planning to earn money for the retirement, the greatest risks associated are the market risks and even inflation risk. It may happen that the rate of inflation goes very high when the person is about to retire and reap the benefits of mutual funds leading to a decline in the net income yield from the funds.