Mar
11
2025
Living off Dividend Income: What You Need to Know
Dividend income: what is it? How is it taxed? Can you make your living off of dividend income alone? We cover all that and more.
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Mar
11
2025
How to Build an Investment Portfolio for Beginners
These days it’s fairly straightforward to set up an investment portfolio, even if you’re a beginner. By understanding a few fundamentals, it’s possible to learn how to create an investment portfolio that can help build your savings over time, and support your progress toward certain goals, like retirement.
Identifying your goals is the first step in the investing process. Then, it’s important to determine a time frame you’ll need to reach your goal — e.g., one year, five years, 30 years — and understand your personal tolerance for risk.
These three fundamentals will help you make subsequent decisions about your investment portfolio, like which investments to choose.
Key Points
• It’s relatively easy to build a basic investment portfolio, using only a few key fundamentals.
• An investment portfolio is usually tied to a goal like retirement or wealth building, or sometimes a savings goal (e.g., a down payment).
• Most investment portfolios consist of securities like stocks, bonds, mutual funds, or other types of assets.
• By identifying your goal, time horizon, and risk tolerance, it’s possible to create a well-balanced portfolio that’s also diversified.
• A beginning investor can select their own investments, work with a financial professional, or choose a robo advisor (which offers pre-set portfolios).
The Basics: What Is an Investment Portfolio?
An investment portfolio is a collection of investments, such as different types of stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and other assets.
Types of Investment Portfolios
An investment portfolio aims to achieve specific investment goals, such as generating income, building wealth, or preserving capital, while managing market risk and volatility.
You might have an investment portfolio in your retirement account, and another portfolio in a taxable account.
While it’s possible to select your own investments, a financial advisor can also help select investment for a portfolio. It’s also possible to invest in a pre-set portfolio known as a robo advisor, or automated portfolio.
These days, investing online is a common route, whether you use an online brokerage or a brick-and-mortar one.
Recommended: How to Start Investing: A Beginner’s Guide
Why Building a Balanced Portfolio Matters
Building a balanced investment portfolio matters for several reasons. As noted above, a balanced, diversified portfolio can help manage the risk and volatility of the financial markets.
What Is a Balanced Portfolio?
While it’s possible to invest all your money in one mutual fund or ETF (or stock or bond), decades of investing research shows that putting all your money into a single investment can be risky. If that single asset drops in value, it would impact your entire nest egg.
Building a balanced portfolio, where you invest in a range of different types of assets — a strategy known as diversification — may help mitigate some risk factors, and over the long term may even improve performance (although there are no guarantees).
The Value of Diversification
Many people avoid building an investment portfolio because they fear the swings of the market and the potential to lose money. But by diversifying investments across different asset classes and sectors, the impact of any one investment on the overall portfolio is reduced.
This beginner investment strategy can help protect the portfolio from significant losses due to the poor performance of any single investment.
Additionally, by including a mix of different types of investments, investors can benefit from the potential returns of different asset classes while minimizing risk. For example, building a portfolio made up of relatively risky, high-growth stocks balanced with stable, low-risk government bonds may allow you to benefit from long-term price growth from the stocks while also generating stable returns from the bonds.
Creating a balanced portfolio and using diversification are strategies to mitigate risk, not a guarantee of returns.
Assessing Risk Tolerance and Setting Investment Goals
In the financial world, risk refers specifically to the risk of losing money. Each investor’s tolerance for risk is an essential component of their personal investing strategy, because it guides their investment choices. Below are two general strategies many investors follow, depending on their risk tolerance.
Conservative vs. Aggressive Investing
• An aggressive investment strategy is for investors who are willing to take risks to grow their money. Aggressive refers to the willingness to take on risk.
Stocks, which are shares in a company, tend to be more risky than bonds, which are debt instruments and generally offer a fixed yield or return over time. When you buy stocks, the value can fluctuate. While the price of bonds also goes up and down, owning a bond can provide a stream of income payments that, in some cases (i.e., government bonds rather than corporate), are guaranteed.
One rule you often hear in finance: High risk, high reward. Which means: Stocks tend to be higher risk investments, with the potential for higher rewards. Bonds tend to be lower risk, with the likelihood of lower returns.
• Conservative investing is for investors who are leery of losing any of their money. Conservative strategies may be better suited for older investors because the closer you get to your ultimate goal, the less room you will have for big dips in your portfolio should the market sell off. But a conservative mindset can apply to any age group.
You can prioritize lower-risk investments as you get closer to retirement. Lower-risk investments can include fixed-income (bonds) and money-market accounts, as well as dividend-paying stocks.
These investments may not have the same return-generating potential as high-risk stocks, but for conservative investors typically the most important goal is to not lose money.
Choosing a Goal for Your Portfolio
Long- and short-term goals depend on where you are in life. Your relationship with money and investing may change as you get older and your circumstances evolve. As this happens, it’s best to understand your goals and figure out how to meet them ahead of time.
If you’re still a beginner investing in your 20s, you’re in luck because time is on your side. That means, when building an investment portfolio you have a longer time horizon in which to make mistakes (and correct them).
You can also potentially afford to take more risks because even if there is a period of market volatility, you’ll likely have time to recover from any losses.
If you’re older and closer to retirement age, you can reconfigure your investments so that your risks are lower and your investments become more conservative, predictable, and less prone to significant drops in value.
As you go through life, consider creating short- and long-term goal timelines. If you keep them flexible, you can always change them as needed. But of course, you’d want to check on them regularly and the big financial picture they’re helping you create.
Short Term: Starting an Emergency Fund
Before you think about an investing portfolio, it’s wise to make sure you have enough money stashed away for emergencies. Whether you experience a job loss, an unplanned move, health problems, auto or home repairs — these, and plenty of other surprises can strike at the worst possible time.
That’s when your emergency fund comes in.
Generally, it makes sense to keep your emergency money in low-risk, liquid assets. Liquidity helps ensure you can get your money if and when you need it. Also, you don’t want to take risks with emergency money because you may not have time to recover if the market experiences a severe downturn.
Medium Term: Saving for a Major Event
It’s also possible to start an investment portfolio for a goal that’s a few years down the road: e.g., graduate school, a wedding, adoption, a big trip, a down payment on a home.
For more ambitious goals like these, you may need more growth than a savings account or certificate of deposit (CD). Learning how to build a portfolio of stocks and other assets could help you reach your goal — as long as you don’t take on too much risk.
In this case, an automated portfolio might make sense, because with a few personal inputs, it’s possible to use these so-called robo advisors to achieve a range of goals using a pre-set portfolio tailored to your goal, time horizon, and risk tolerance.
Recommended: What Is Automated Investing?
Long Term: Starting a Retirement Portfolio
One of the most common types of longer-term investing portfolios is your retirement portfolio.
How to build an investment portfolio for this crucial goal? First, think about your desired retirement age, and how much money you would need to live on yearly in retirement. You can use a retirement calculator to get a better idea of these expenses.
One of the most frequently recommended strategies for long-term retirement savings is starting a 401(k), opening an IRA, or doing both. The benefit of this type of investment account is that they have tax advantages.
Another benefit of 401(k)s and IRAs is that they help you build an investment portfolio over the long term.
Prioritizing Diversification
As mentioned above, portfolio diversification means keeping your money in a range of assets in order to manage risk. All investments are risky, but in different ways and to varying degrees. For example, by investing in lower-risk bonds as well as equities (stocks), you may help offset some of the risk of investing in stocks.
The idea is to find a balance of potential risk and reward by investing in different asset classes, geographies, industries, risk profiles.
Types of Diversification
• While diversification sounds straightforward, it can be quite complex. There are a multitude of diversification strategies. Some examples:
• Simple diversification. This refers to distributing your assets among a variety of different asset classes (e.g. stocks, bonds, real estate, etc.).
• Geographic diversification. You can target different global regions with your investments, to achieve a balance of risk and return.
Market capitalization. Investing in large-cap versus small-cap funds is another way to create a balance of equities within your portfolio.
Understanding Types of Risk
Diversification can help manage certain types of risk, but not all types of risk.
Systematic Risk
Systematic risk is considered ‘undiversifiable’ because it’s inherent to the entire market. It’s due to forces that are essentially unpredictable.
In other words: Big things happen, like economic peaks and troughs, geopolitical conflicts, and pandemics. These events will affect almost all businesses, industries, and economies. There are not many places to hide during these events, so they’ll likely affect your investments too.
One smart way to manage systematic risk: You may want to calculate your portfolio’s beta, another term for the systematic risk that can’t be diversified away. This can be done by measuring your portfolio’s sensitivity to broader market swings.
Understanding Idiosyncratic Risk
Idiosyncratic risk is different in that this type of risk pertains to a certain industry or sector. For instance, a scandal could rock a business, or a tech disruption could make a particular business suddenly obsolete.
As a result, a stock’s value could fall, along with the strength of your investment portfolio. This is where portfolio diversification can have an impact. If you only invest in three companies and one goes under, that’s a big risk. If you invest in 20 companies and one goes under, not so much.
Owning many different assets that behave differently in various environments can help smooth your investment journey, reduce your risk, and hopefully allow you to stick with your strategy and reach your goals.
4 Steps Towards Building an Investment Portfolio
Here are four steps toward building an investment portfolio:
1. Set Your Goals
The first step to building an investment portfolio is determining your investment goals. Are you investing to build wealth for retirement, to save for a down payment on a home, or another reason? Your investment goals will determine your investment strategy.
2. What Sort of Account Do You Want?
Investors can choose several kinds of investment accounts to build wealth. The type of investment accounts that investors should open depends on their investment goals and the investments they plan to make. Here are some common investment accounts that investors may consider:
Taxable vs. Tax-Deferred Accounts
• Individual brokerage account: This is a taxable brokerage account that allows investors to buy and sell stocks, bonds, mutual funds, ETFs, and other securities. This account is ideal for investors who want to manage their own investments and have the flexibility to buy and sell securities as they wish.
Gains are taxable, either as ordinary income or according to capital gains tax rules.
• Retirement accounts: These different retirement plans, such as 401(k)s, traditional, SEP and SIMPLE IRAs are all considered tax-deferred accounts. The money you contribute (or save) reduces your taxable income for that year, but you pay taxes later in retirement. These accounts have contribution limits and may restrict when and how withdrawals can be made.
Note that Roth IRAs are not tax-deferred, but they are tax advantaged accounts as well. The money you contribute is after-tax (it won’t reduce your current-year taxable income), and qualified withdrawals in retirement are tax free.
• Automated investing accounts: These accounts, also known as robo advisors, use algorithms to manage investments based on an investor’s goals and risk tolerance.
3. Choosing Investments Based on Risk Tolerance
Once you’ve set your investment goals, the next step is to determine your investments based on your risk tolerance. As discussed above, risk tolerance refers to the amount of risk you are willing to take with your investments.
Balancing Risk and Return
If you’re comfortable with higher levels of risk, you may be able to invest in more aggressive assets, such as stocks or commodities. Higher risk investments may provide bigger gains — but there are no guarantees.
If you’re risk-averse, you may prefer more conservative investments, such as bonds or certificates of deposit (CDs). Lower-risk investments are less volatile, but they generally offer a lower return.
Recommended: How to Invest in Stocks: A Beginner’s Guide
4. Allocating Your Assets
The next step in building an investment portfolio is to choose your asset allocation. This involves deciding what percentage of your portfolio you want to allocate to different investments, such as stocks, bonds, and real estate.
Once you have built your investment portfolio, it is important to monitor it regularly and make necessary adjustments. This may include rebalancing your portfolio to ensure it remains diversified and aligned with your investment goals and risk tolerance.
The Takeaway
Building an investment portfolio is a process that depends on where a person is in their life as well as their financial goals, and their risk tolerance. Every individual should consider long-term and short-term investments and the importance of portfolio diversification when building an investment portfolio and investing in the stock market.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
How much money do you need to start building an investment portfolio?
The amount needed to start building an investment portfolio can vary depending on your goal, but it’s possible to start with a small amount, such as a few hundred or thousand dollars. Some online brokers and investment platforms have no minimum requirement, making it possible for investors to start with very little money.
Can beginners create their own stock portfolios?
Beginners can create their own stock portfolios. Access to online brokers and trading platforms makes it easier for beginners to buy and sell stocks and build their own portfolios.
What should be included in investment portfolios?
Generally, an investment portfolio should include a mix of investments, such as stocks, bonds, mutual funds, ETFs, and cash, depending on the investor’s goals, risk tolerance, and time horizon. Regular monitoring and rebalancing are important to keep the portfolio aligned with the investor’s objectives.
What is the 60/40 portfolio rule?
The 60-40 rule refers to 60% equities (or stock) and 40% bonds. It’s a basic portfolio allocation, and as such may not be right for everyone.
What is a balanced portfolio?
A balanced portfolio ideally includes a range of asset classes in order to manage risk and potential market volatility.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
SOIN-Q125-037 Read more
Mar
11
2025
Are Mutual Funds Good for Retirement?
Mutual funds are one option investors may consider when building a retirement portfolio. A mutual fund represents a pooled investment that can hold a variety of different securities, including stocks and bonds. There are different types of mutual funds investors may choose from, including index funds, target date funds, and income funds.
But how do mutual funds work? Are mutual funds good for retirement or are there drawbacks to investing in them? What should be considered when choosing retirement mutual funds?
Those are important questions to ask when determining the best ways to build wealth for the long term. Here’s what you need to know about mutual funds and retirement.
Key Points
• Mutual funds offer exposure to a wide range of asset classes, and thus may fit well in a retirement portfolio.
• Approximately 53.7% of U.S. households owned mutual funds in 2024, according to industry research.
• Target-date funds adjust their asset allocation as retirement approaches, offering a tailored solution.
• Income funds focus on generating steady income, and may be suitable for retirement needs.
• Potential drawbacks of mutual funds include high fees, portfolio overweighting, and tax inefficiency.
Understanding Mutual Funds
A mutual fund pools money from multiple investors, then uses those funds to invest in a number of different securities. Mutual funds can hold stocks, bonds, and other types of securities.
How a mutual fund is categorized depends largely on what the fund invests in and what type of investment strategy it follows. For example, index funds follow a passive investment strategy, as these funds mirror the performance of a stock market benchmark. So a fund that tracks the S&P 500 index would attempt to replicate the returns of the companies included in that index.
Target-date funds utilize a different strategy. These funds automatically adjust their asset allocation based on a target retirement date. So a 2050 target-date fund, for example, is designed to shift more of its asset allocation toward bonds or fixed-income and away from stocks as the year 2050 approaches.
How Mutual Funds Work
Mutual funds allow investors to purchase shares in the fund. buying shares makes them part-owner of the fund and its underlying assets. As such, investors have the right to share in the profits of the fund. So if a mutual fund owns dividend-paying stocks, for example, any dividends received would be passed along to the fund’s investors.
• Understanding dividend payments. Depending on how the fund is structured or what the brokerage selling the fund offers, investors may be able to receive any dividends or interest as cash payments or they may be able to reinvest them. With a dividend reinvestment plan or DRIP, investors can use dividends to purchase additional shares of stock, often bypassing brokerage commission fees in the process.
• Understanding fund fees. Investors pay an expense ratio to invest in mutual funds. This reflects the annual cost of owning the fund, expressed as a percentage. Passively managed mutual funds tend to have lower expense ratios.
Actively managed funds, on the other hand, tend to be more expensive, but the idea is that higher fees may seem justified if the fund produces above-average returns.
It’s also important to know that mutual funds are priced and traded just once a day, after the market closes. This is different from exchange-traded funds, or ETFs, for example, which are similar to mutual funds in many ways, but trade on an exchange just like stocks, and typically require a lower initial investment than a mutual fund.
Investors interested in opening an investment account can learn more about how a particular mutual fund works, what it invests in, and the fees involved by reading the fund’s prospectus.
Types of Mutual Funds for Retirement
There are some mutual funds designed for people who are saving for retirement. These funds typically combine portfolio diversification, often with a greater emphasis on bonds and fixed income, and the potential for moderate gains.
For instance, retirement income funds (RIFs) are intended to be more conservative with moderate growth. RIFs may be mutual funds, ETFs, or annuities, among other products.
Target-rate funds, as mentioned, adjust their asset allocation based on an investor’s intended retirement date, and get more conservative as that date approaches. This automated strategy may help some retirement savers who are less experienced at managing their portfolios over time.
Recommended: What is Full Retirement Age for Social Security?
Mutual Funds for Retirement Planning
Mutual funds are arguably one of the most popular investment options for retirement planning. According to the Investment Company Institute, 53.7% of U.S. households totaling approximately 121.6 million individual investors owned mutual funds in 2024. Fifty-three percent of individuals who own mutual funds are ages 35 to 64 — in other words, those who may be planning for retirement — the research found.
There are also many investors living in retirement who own mutual funds. According to the Investment Company Institute, 58% of households aged 65 or older owned mutual funds in 2024.
So are mutual funds good for retirement? Here are some of the pros and cons to consider.
Pros of Using Mutual Funds for Retirement
Investing in mutual funds for retirement planning could be attractive for investors who want:
• Convenience
• Basic diversification
• Professional management
• Reinvestment of dividends
Investing in a mutual fund can offer exposure to a wide range of securities, which could help with diversifying a portfolio. And it may be easier and less costly to purchase a single fund that holds hundreds of stocks than to purchase individual shares in each of those companies.
The majority of mutual funds are actively managed (and sometimes called active funds). Actively managed mutual funds are professionally managed, so investors can rely on the fund manager’s expertise and knowledge. And if the fund includes dividend reinvestment, investors can increase their holdings automatically which can potentially add to the portfolio’s growth.
Cons of Using Mutual Funds for Retirement
While there are some advantages to using mutual funds for retirement planning, there are also some possible disadvantages, including:
• Potential for high fees
• Overweighting risk
• Under-performance
• Tax inefficiency
As mentioned, mutual funds carry expense ratios. While some index funds may charge as little as 0.05% in fees, there are some actively managed funds with expense ratios well above 1%. If those higher fees are not being offset by higher than expected returns (which is never a guarantee), the fund may not be worth it. Likewise, buying and selling mutual fund shares could get expensive if your brokerage charges steep trading fees.
While mutual funds generally make it easier to diversify, there’s the risk of overweighting one’s portfolio — owning the same holdings across different funds. For example, if you’re invested in five mutual funds that hold the same stock and the stock tanks, that could drag down your portfolio.
Something else to keep in mind is that an actively managed mutual fund is typically only as good as the fund manager behind it. Even the best fund managers don’t always get it right. So it’s possible that a fund’s returns may not live up to your expectations.
You may also have to contend with unexpected tax liability at the end of the year if the fund sells securities at a gain. Just like other investments, mutual funds are subject to capital gains tax. Whether you pay short- or long-term capital gains tax rates depends on how long you held a fund before selling it.
If you hold mutual funds in a tax-advantaged retirement account, then capital gains tax doesn’t enter the picture for qualified withdrawals
| Pros of Mutual Funds | Cons of Mutual Funds |
|---|---|
|
• Mutual funds offer convenience for investors • It may be easier and more cost-effective to diversify using mutual funds vs. individual securities • Investors benefit from the fund manager’s experience and knowledge • Dividend reinvestment may make it easier to build wealth |
• Some mutual funds may carry higher expense ratios than others • Overweighting can occur if investors own multiple funds with the same underlying assets • Fund performance may not always live up to the investor’s expectations • Income distributions may result in unexpected tax liability for investors |
Investing in Mutual Funds for Retirement Planning
The steps to invest in mutual funds for retirement are simple and straightforward.
1. Start with an online brokerage account, individual retirement account (IRA) such as a traditional IRA, or a 401(k). You can also buy a mutual fund directly from the company that created it, but a brokerage account or retirement account is usually the easier way to go.
2. Set your budget. Decide how much money you can afford to invest in mutual funds. Keep in mind that the minimum investment can vary for different funds. One fund may allow you to invest with as little as $100 while another might require $1,000 to $3,000 or even more to get started. In some cases, setting up automatic contributions may lower the required minimum.
3. Choose funds. If you already have a brokerage account or an IRA like a SEP IRA, this may simply mean logging in, navigating to the section designated for buying funds, selecting the fund or funds and entering in the amount you want to invest.
4. Submit your order. You may be asked to consent to electronic delivery of the fund’s prospectus when you place your order. If your brokerage charges a fee to purchase mutual funds, that amount will likely be added to the order total. Once you submit your order to purchase mutual funds, it may take a few business days to process.
Tips for Selecting Retirement-Ready Mutual Funds
If you’re considering investing in mutual funds for retirement, here are some strategies to keep in mind.
• Determine your risk tolerance and retirement goals. As discussed previously, the closer you are to retirement, the more conservative you may want to be. For example, you might want to consider target-date or bond funds.
• Analyze the fund’s performance. You can look for funds that have a history of consistent returns for the past three, five, and 10 years.
• Check out expense ratios. If a mutual fund’s fees are high, you may want to consider other funds instead.
• Evaluate the possible tax implications. Mutual funds are subject to capital gains tax, as mentioned. Index funds may be more tax efficient. You can read more about this below.
Determining If Mutual Funds Are Right for You
Whether it makes sense to invest in mutual funds for retirement can depend on your time horizon, risk tolerance, and overall investment goals. If you’re leaning toward mutual funds for retirement planning, here are a few things to consider.
Investment Strategy
When comparing mutual funds, it’s important to understand the overall strategy the fund follows. Whether a fund is actively or passively managed may influence the level of returns generated. The fund’s investment strategy may also determine what level of risk investors are exposed to.
For example, index funds are designed to mirror the market. Growth funds, on the other hand, typically have a goal of beating the market. Between the two, growth funds may produce higher returns — but they may also entail more risk for the investor and carry higher expense ratios.
Choosing funds that align with your preferred strategy, risk tolerance, and goals matters. Otherwise, you may be disappointed by your returns or be exposed to more risk than you’re comfortable with.
Cost
Cost is an important consideration when choosing mutual funds for one reason: Higher expense ratios can eat away more of your returns.
When comparing mutual fund expense ratios, it’s important to look at the amount you’ll pay to own the fund each year. But it’s also important to consider what kind of returns the fund has produced historically. A low-fee fund may look like a bargain, but if it generates low returns then the cost savings may not be worth much.
It’s possible, however, to find plenty of low-cost index funds that produce solid returns year over year. Likewise, you shouldn’t assume that a fund with a higher expense ratio is guaranteed to outperform a less expensive one.
Fund Holdings
It’s critical to look under the hood, so to speak, to understand what a particular mutual fund owns and how often those assets turn over. This can help you to avoid overweighting your portfolio toward any one stock or sector.
Reading through the prospectus or looking up a stock’s profile online can help you to understand:
• What individual securities a mutual fund owns
• Asset allocation for each security in the fund
• How often securities are bought and sold
If you’re interested in tech stocks, for example, you may want to avoid buying two funds that each have 10% of assets tied up in the same company. Or you may want to choose a fund that has a lower turnover rate to minimize your capital gains tax liability for the year.
Tax Efficiency of Mutual Funds in Retirement
As mentioned, when held in a taxable account mutual funds are subject to capital gains tax. Dividend income from mutual funds is also taxed. When mutual funds are held in a tax-advantaged retirement account, investors need to consider the tax treatment of those accounts rather than capital gains.
With actively managed mutual funds, fund managers typically need to constantly rebalance the fund by
selling securities to reallocate assets, among other things. Those sales may create capital gains for investors. While mutual fund managers usually use tax mitigation strategies to help diminish annual capital gains, this is a factor for investors to consider.
Index funds tend to have less turnover of assets than actively managed funds and thus may generally be more tax efficient.
Managing Risk with Mutual Funds in a Retirement Portfolio
Generally speaking, mutual funds offer diversification and less risk compared to some other investments. That’s why they are often part of a retirement portfolio. However, it’s important to remember risk is inherent in investing whether you’re investing in mutual funds or another asset class.
Investors can select mutual funds that align with their risk tolerance, financial goals, and the amount of time they have before retirement (the time horizon). A younger investor may choose funds that potentially offer higher growth but also have higher risk like stock funds. Those closer to retirement age may opt for more conservative options, such as bond funds, and they might want to consider target rate funds that automatically adjust their asset allocation to be in sync with an investor’s retirement date.
Performance of Mutual Funds Compared to Other Retirement Investments
When considering mutual funds, it’s important to look at a fund’s performance over time. Not all funds hit their benchmarks or deliver consistent returns over the long term.
In 2024, according to Morningstar, of the nearly 3,900 actively managed equity funds tracked, only 13.2% beat the S&P 500 SPX index. The average gain was 13.5% compared to the 25% return of the S&P 500.
Historically, index funds have generally performed better overall than actively managed funds.
Other Types of Funds for Retirement
Mutual funds, and target date funds in particular, are one of the ways to save for retirement. But there are other options you might consider. Here’s a brief rundown of other types of funds that can be used for retirement planning.
Real Estate Investment Trusts (REITs)
A real estate investment trust isn’t a mutual fund. But it is a pooled investment that allows multiple investors to own a share in real estate. REITs pay out 90% of their income to investors as dividends.
An investor might consider a REIT, which is considered a type of alternative investment, if they’d like to reap the potential benefits of real estate investing without actually owning property.
Exchange-Traded Funds (ETFs)
Exchange-traded funds are another retirement savings option. Investing in ETFs — for instance, through a Roth or traditional IRA — may offer more flexibility compared to mutual funds. They may carry lower expense ratios than traditional funds and be more tax-efficient if they follow a passive investment strategy.
Income Funds
An income fund is a specific type of mutual fund that focuses on generating income for investors. This income can take the form of interest or dividend payments. Income funds could be an attractive option for retirement planning if an individual is interested in creating multiple income streams or reinvesting dividends until they’re ready to retire.
Bond Funds
Bond funds focus exclusively on bond holdings. The type of bonds the fund holds can depend on its objective or strategy. For example, you may find bond funds or bond ETFs that only hold corporate bonds or municipal bonds, while others offer a mix of different bond types. Bond funds could potentially help round out the fixed-income portion of your retirement portfolio.
IPO ETFs
An initial public offering or IPO represents the first time a company makes its shares available for trade on a public exchange. Investors can invest in multiple IPOs through an ETF. IPO ETFs invest in companies that have recently gone public so they offer an opportunity to get in on the ground floor. However, IPO ETFs are relatively risky and are generally more suitable for experienced investors.
The Takeaway
Mutual funds can be part of a diversified retirement planning strategy. Regardless of whether you choose to invest in mutual funds, ETFs or something else, the key is to start saving for your pos-work years sooner rather than later. Time can be one of your most valuable resources when investing for retirement.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
FAQ
Are mutual funds safer than individual stocks for retirement?
Generally speaking, mutual funds tend to carry less risk than individual stocks for retirement. Mutual funds provide diversification by investing in a mix of stocks, bonds, and other assets, which may help reduce overall risk. Individual stocks, on the other hand, depend on the performance of one company, which makes them riskier.
What percentage of my retirement portfolio should be in mutual funds?
There is no one single approach to asset allocation. The percentage of your portfolio that’s in mutual funds depends on your individual goals, risk tolerance, and time horizon. Younger investors with retirement far in the future may want to consider a more aggressive strategy that’s heavier on stocks, with more possibility for growth, but also involves more risk. Conversely, an investor near retirement age will likely want to be more conservative, and they might choose less risky options such as fixed income and bond funds.
How often should I review my mutual fund holdings?
There is no fixed rule for how often to review mutual fund holdings. Some investors may prefer biannual or annual reviews, while others might feel more comfortable with quarterly reviews. Reviewing a portfolio can help you monitor mutual fund performance, track your returns, and manage risk, so choose the schedule you are most comfortable with.
Can mutual funds provide steady income in retirement?
Certain types of mutual funds, such as retirement income funds (RIFs), are designed to provide a steady source of income in retirement. Ideally, an investor may want to have a mix of stocks, bonds, and cash investments that provide streams of income and growth in retirement and help preserve their money.
What are the tax implications of mutual fund investments in retirement?
Mutual funds are subject to capital gains tax when held in a taxable account. Actively managed funds must report capital gains every time a share is sold or purchased and may result in more capital gains tax. Index funds tend to have less turnover of assets and are generally more tax efficient. However, you may wish to consult a tax professional about your specific situation.
Photo credit: iStock/kali9
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN-Q125-056
Read moreMar
11
2025
Understanding Student Loan Tax Forms: How To Get and Use Them
If you’re a borrower who paid interest on a qualified student loan, it’s possible to deduct some or all of that interest on your federal income tax return with a special tax form for student loans.
To do so, you’ll need a student loan tax form known as IRS Form 1098-E. You can use this form to report how much you paid in student loan interest on your tax return. One copy of the form will go to the IRS when you file your taxes, and you’ll keep the other.
To learn how to get your student loan interest tax form, when to deduct student loan interest, and how to file a student loan tax form, keep reading.
Key Points
• Form 1098-E is a tax form sent by loan servicers or lenders to student loan borrowers who paid at least $600 in student loan interest for the year.
• The student loan interest deduction amount is up to $2,500, based on Modified Adjusted Gross Income (MAGI) and tax filing status.
• Borrowers use Form 1098-E to help calculate the amount of student loan interest deduction they qualify for when filing their federal income taxes.
• Common errors include failing to claim the student loan interest deduction, misreported interest amounts, and claiming an incorrect deduction amount.
• International students may qualify for the student loan interest deduction if they meet specific criteria.
Common Student Loan Tax Forms and Their Purpose
The IRS Form 1098-E is a tax form for student loans that’s sent out by your loan servicer or your lender.
The loan servicer is required to send borrowers a 1098-E to complete their taxes if the borrower paid at least $600 in student loan interest during the tax year. Typically, loan servicers get the forms out by the end of January, since the interest forms for student loans and tax season coincide.
If you have more than one loan servicer, you’ll receive a 1098-E form from each one.
Why Student Loan Tax Forms Matter
The student loan interest tax form is designed to give people with student loan debt the opportunity to deduct from their federal income taxes some of the interest that they paid for the year on their loan. It is one of the student tax deductions borrowers may be able to claim.
If you paid at least $600 in interest on a qualified student loan (meaning a loan taken out to cover higher education expenses such as tuition, fees, books, and supplies), the lender you paid that interest to should send you a 1098-E. This includes federal loans, private loans, and refinanced student loans.
Recommended: Do Student Loans Count as Income>
Uses of a Student Loan Tax Form
The student loan tax form is used to calculate your student loan interest deduction on your tax return.
As long as you meet certain conditions, you may be eligible to deduct up to $2,500 in student loan interest from your taxable income:
• You paid interest on a qualified student loan for yourself, your spouse, or your dependents in the previous tax year.
• Your filing status is anything except married filing separately.
• Your income is below the annual limit.
• You are legally obligated to pay the interest, not someone else.
• If you’re filing a joint return, neither you nor your spouse is being claimed as a dependent on another person’s tax return.
Eligibility for the student loan interest deduction is determined based on a borrower’s modified adjusted gross income (MAGI). At a certain higher income bracket, the deduction is reduced or eliminated.
• For taxpayers filing as single: The deduction for 2024 is reduced when a borrower’s MAGI is more than $80,000 of MAGI, and the deduction is eliminated at $95,000.
• For taxpayers filing jointly: The 2024 deduction is reduced when MAGI is more than $165,000, and the deduction is eliminated at $195,000.
How to Obtain Your Student Loan Tax Forms
To obtain your student loan interest tax form and ensure you aren’t missing any tax documents this season, there are a few steps you can take:
1. Go directly to your loan servicer’s website, where a downloadable 1098-E form will likely be available.
2. Call your loan servicer if you’re unable to visit their website.
3. If you don’t know who your loan servicer is, visit StudentAid.gov, then complete steps 1 and 2.
If you have private student loans, or you’ve refinanced your student loans, contact your lender directly.
Recommended: What Is IRS Form 1098?
How to Fill Out a Student Loan Tax Form (Form 1098-E)
When it comes to filling out a student loan tax form, the IRS provides detailed instructions for the current tax season to help financial, educational, and governmental institutions and borrowers cover all their bases.
According to the IRS, if a loan servicer receives student loan interest of $600 or more from an individual during the year in the course of their trade or business, they must:
• File a 1098-E form and;
• Provide a statement or acceptable substitute, on paper or electronically, to the borrower
There are two boxes on the 1098-E form:
• Box 1 is the amount of student loan interest received by the lender. It’s important to note, this figure represents interest paid, not loan payments made.
• Box 2, if checked, denotes the fact that the amount in Box 1 does not include loan origination fees and/or capitalized interest for loans made before September 1, 2004.
Once you, as the student loan borrower, receive the 1098-E form, it’s up to you to include it when you file your taxes.
How and When to Deduct Student Loan Interest
Student loan interest deduction is a type of federal income tax deduction for student loan borrowers that lets them deduct up to $2,500 of the interest paid on qualified student loans from their taxable income. It’s one of the tax breaks available to students and their parents to help them pay for college.
To know when to deduct student loan interest, it’s important to understand if you meet the necessary qualifications:
Your student loan was taken out for the taxpayer (you), your spouse, or your dependent(s).
• Your student loan was taken out when you were enrolled at least half-time in an academic program that led to a degree, certificate, or recognized credential.
• Your student loan was used for qualifying education expenses such as tuition, textbooks, supplies, fees, or equipment (not including room and board, insurance, or transportation).
• Your student loan was used within a “reasonable period of time,” and its proceeds were disbursed 90 days before the beginning of the academic period in which they were used or 90 days after it ended.
• The college or school where you were enrolled is considered an eligible institution that participates in student aid programs.
Do International Students Have a Different Tax Form?
For international students, it’s possible to deduct student loan interest from a foreign country, as long as their student loan is qualified (meeting the requirements listed above) and they’re legally obligated to make student loan payments on that loan.
There’s no need for international students to acquire a special international student tax form, however. The year-end financial statement from their loan servicer is typically sufficient enough proof for them to claim the student loan interest.
How to Claim the Student Loan Interest Deduction
To claim the student loan interest deduction you’ll need Form 1098-E that shows you paid at least $600 in interest on a qualified student loan for the tax year in question. If you have more than one loan servicer, you should get multiple 1098-E forms.
If your MAGI is in the range where student interest deduction is reduced, as noted above (more than $80,000 for single filers and $165,000 for joint filers), you can generally follow the instructions on the student loan interest deduction worksheet in Schedule 1 of Form 1040 to figure out the amount of your deduction when filing your federal income taxes. Then, you can enter the calculated interest amount on Schedule 1 of the 1040 under “Adjustments to Income.”
Keep in mind that the student loan interest deduction reduces your taxable income for the year — it’s not a credit that reduces dollar-for-dollar the amount of taxes you owe. This is a major difference between a tax credit vs tax deduction.
Common Mistakes to Avoid When Filing Student Loan Tax Forms
It’s important to be accurate when filing student loan tax documents. Some common mistakes to watch out for include:
• Failing to claim the deduction. Don’t overlook Form 1098-E. This can happen during the busy tax season when there is a lot of paperwork to keep track of. Keep an eye out for the form in the mail, or log onto your loan servicer’s website to download before the tax filing deadline.
• Incorrect interest amount on Form 1098-E. Review your 1098-E form carefully to make sure all the information on it is correct. Double-check the interest amount listed on the form with your records of the loan payments, including interest, you’ve made.
• Claiming an incorrect amount for the deduction. The amount of student loan interest tax deduction you can claim depends on your MAGI and tax filing status. As noted, you’re eligible for a reduced deduction if your MAGI is more than $80,000 as a single filer and $165,000 as a joint filer. Follow the instructions on Schedule 1 of Form 1040 to figure how much of a deduction you can claim, or consult a tax professional.
• Filing when ineligible for the deduction. As discussed, not all borrowers are eligible for the student loan interest deduction. Your student loans must be qualified and your MAGI must be below the cut-off levels to qualify for a full or reduced deduction. Those whose MAGI is $95,000 or more as single filers or $195,000 or more as joint filers are ineligible for the deduction.
The Takeaway
If you paid interest on a qualified student loan for yourself or a dependent, you can likely deduct at least some of that interest on this year’s tax return. This applies to federal, private, and refinanced student loans. Once you’ve determined when and whether you’re able to deduct student loan interest and how to file a student loan interest tax form, watch for your loan servicer to send you a copy of your 1098-E or visit your loan servicer’s or lender’s website to download the form.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
What is Form 1098-E and how do I use it?
Form 1098-E is a tax form for student loans sent out by your loan servicer or lender. The form is sent to borrowers who paid at least $600 in interest on their student loans for the year. If you have more than one loan servicer or lender, you’ll receive a 1098-E from each one. You can then use the form to help calculate your student loan interest tax deduction on your federal tax return.
Can I deduct student loan interest if I’m still in school?
If you’re making student loan payments while you’re in school — even if you’re making interest-only payments — you may be able to claim the student loan interest deduction as long as you paid $600 or more in interest for the year.
How do I know if I qualify for a student loan tax deduction?
You should qualify for a student loan tax deduction if you: have a qualified student loan, paid at least $600 in interest during the tax year, are legally obligated to pay interest on a qualified student loan, cannot be claimed as a dependent on someone else’s return, have a tax filing status that is anything except married filing separately, and your MAGI is under the annual cut-off amount.
Do private student loans qualify for tax deductions?
Qualified student loans, including private student loans, are eligible for the student loan interest deduction as long as you paid at least $600 in interest on your loans for the year in question.
What should I do if I didn’t receive my student loan tax form?
If you didn’t receive your student loan tax form, go to your loan servicer’s or lender’s website where you should be able to download a copy of the form. If you can’t find it there or you have questions, call your loan servicer for assistance.
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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOSLR-Q125-026
Read moreMar
11
2025
What is Delta in Options Trading?
Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
In options trading, delta measures the sensitivity of an option’s price relative to changes in the price of its underlying asset. Delta is a risk metric that compares changes in a derivative’s underlying asset price to the change in the price of the derivative itself.
In short, delta measures the sensitivity of a derivative’s price to a change in the underlying asset. Using delta as part of an option’s assessment may help investors make better trades.
Key Points
• Delta measures how option prices change in response to the underlying asset’s price.
• Call options have a delta between 0 and 1; put options have a delta between 0 and -1.
• Higher absolute delta values indicate greater price sensitivity.
• Delta-neutral strategies balance portfolios by offsetting price movements.
• Delta offers a probabilistic estimate of price movement, not a guaranteed outcome.
What Is Delta?
Delta is one of “the Greeks,” a set of trading tools denoted by Greek letters. Some in options trading refer to the Greeks as risk sensitivities, risk measures, or hedge parameters. The delta metric is a commonly used Greek for measuring risk; the other four are gamma, theta, vega, and rho.
Delta Example
For each $1 that an underlying stock moves, the derivative’s price changes by the delta amount. Investors typically express delta as a decimal value or percentage. For example, let’s say there is a long call option with a delta of 0.40. If the option’s underlying asset increased in price by $1.00, the option price would increase by $0.40.
Because delta changes alongside underlying asset changes, the option’s price sensitivity also shifts over time. Various factors impact delta, including asset volatility, asset price, and time until expiration.
For call options, delta increases toward 1.0 as the underlying asset price rises. For put options, delta moves toward -1.0 as the underlying asset’s price falls.
Recommended: A Beginner’s Guide to Options Trading
How Is Delta Calculated?
Analysts calculate delta using the following formula with theoretical pricing models:
Δ = ∂V / ∂S
Where:
• ∂ = the first derivative
• V = the option’s price (theoretical value)
• S = the underlying asset’s price
The formula Δ = ∂V / ∂S represents how small changes in the underlying price (S) affects the option’s value (V).
Some analysts may calculate delta with the more complex Black-Scholes model that incorporates additional factors. This model is a widely used theoretical pricing model that factors in volatility, time decay, and interest rates to estimate an investment’s delta. Traders generally don’t calculate the formula themselves, as trading software and exchanges do it automatically.
How to Interpret Delta
Delta is a ratio that compares changes in the price of derivatives and their underlying assets. The direction of price movements will determine whether the ratio is positive or negative.
Bullish options strategies have a positive delta, and bearish strategies have a negative delta. It’s important to remember that unlike stocks, buying or selling options does not necessarily indicate a bullish or bearish strategy.
Traders use delta to gain an understanding of whether an option will expire in the money or not. The more an option is in the money, the further the delta value will deviate from 0, towards either 1 or -1.
The more an option goes out of the money, the closer the delta value gets to 0. Higher delta means higher sensitivity. An option with a 0.9 delta, for example, will change more if the underlying asset price changes than an option with a 0.10 delta. If an option is at the money, the underlying asset price is the same as the strike price, so there is a 50% chance that the option will expire in the money or out of the money.
Recommended: Differences Between Options and Stocks
Calls: Long and Short
For call options, delta is positive, indicating that the option’s price will increase as the underlying asset increases. Delta’s value for calls range from 0 to 1. When a call option is at the money (i.e. the asset price equals the strike price), the delta is near 0.50, meaning it has an equal probability of being out-of-money or in-the-money. As the underlying asset’s price increases, delta moves closer to 1. This signals that the option has demonstrated a high price sensitivity.
• For long call positions, delta increases toward 1 as the underlying asset’s price rises, signaling greater price sensitivity.
• For short call positions, delta is negative, meaning the position loses value as the asset price increases
Puts: Long and Short
For put options, delta is negative, indicating that the option’s price will increase when the underlying asset’s price decreases. Delta’s value for puts ranges from 0 to -1. As with call options, when a put option is at the money, the delta is near -0.50, representing an equal probability that the put could expire in or out of the money. If an underlying asset’s price decreases, the delta would move closer to -1, which would indicate an option has high price sensitivity to price changes in its underlying asset.
• For long put positions, delta moves closer to -1 as the underlying asset’s price decreases, indicating greater price sensitivity.
• For short put positions, delta is positive, meaning the position loses value as the asset price declines.
How Traders Use Delta
In addition to assessing option sensitivity, traders look to delta as a probability that an option will end up in or out of the money.
Every investor has their own risk tolerance, so some might be more willing to take on a risky investment if it has a greater potential reward. When considering Delta, traders recognize that the closer it is to 1 or -1, the greater the option’s sensitivity is to movements in the underlying asset.
If a long call has a Delta of 0.40, traders often interpret this as a 40% chance of expiring in the money. So if a long call option has a strike price of $30, the owner has the right to buy the stock for $30 before the expiration date. There is believed to be a 40% chance that the stock’s price will increase to at least $30 before the option contract expires. These outcomes are not guaranteed, however.
Traders also use Delta to put together options spread strategies.
Delta Neutral
Traders may also use Delta to hedge against risk. One common options trading strategy, known as Delta neutral, is to hold several options with a collective Delta near 0.
The strategy reduces the risk of the overall portfolio of options. If the underlying asset price moves, it will have a smaller impact on the total portfolio of options than if a trader only held one or two options.
One example of this is a calendar spread strategy, in which traders use options with various expiration dates in order to get to Delta neutral.
Delta Spread
With a delta spread strategy, traders buy and sell various options to create a portfolio that offsets so the overall delta is near zero. With this strategy the trader hopes to make a small profit off of some of the options in the portfolio.
Using Delta Along With Other Greeks
Delta measures an option’s directional exposure. It is just one of the Greek measurement tools that traders use to assess options. There are five Greeks that work together to give traders a comprehensive understanding of an option. The Greeks are:
• Delta (Δ): Measures the sensitivity between an option price and the price of the underlying security.
• Gamma (Γ): Measures the rate at which delta is changing.
• Theta (θ): Measures the time decay of an option. Options become less valuable as the expiration date gets closer.
• Vega (υ): Measures how much implied volatility affects an option’s value. Higher implied volatility generally leads to higher option premiums.
• Rho (ρ): Measures an option’s sensitivity to changing interest rates. Rho is most suited for long-dated options because changes in interest rates have a larger effect on their value.
The Takeaway
Delta provides an estimate of how much the price of an option may change relative to a $1 change in the price of its underlying security. Delta is a useful metric for traders evaluating options and can help investors determine their options strategy. Traders often combine it with other tools and ratios during technical analysis.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
FAQ
What does a 10 delta option mean? Or a 30 delta option?
A 10 delta option means the option’s price is expected to change by $0.10 for every $1.00 change in the underlying asset’s price. A 30 delta option would change by $0.30 for the same price movement.
What is the ideal delta for a covered call?
The ideal delta for a covered call is typically between 0.30 and 0.40. This range balances earning a decent premium while minimizing the risk of the call being exercised too quickly.
Do you want high or low delta options?
It depends on your strategy. High delta options are more sensitive to price changes in the underlying asset and are closer to being in the money. Low delta options are less sensitive but cost less and are generally further out of the money.
How accurate is delta in options trading?
Delta is an estimate, not a guarantee. It’s generally accurate for small price changes in the underlying asset, but may become less reliable for larger movements since delta itself changes over time (as it’s influenced by gamma).
Why is delta negative for put options?
Delta is negative for put options because their value increases as the underlying asset’s price decreases. The negative delta reflects this inverse relationship.
Does delta increase with volatility?
Not directly. Delta measures price sensitivity, while volatility impacts vega (which reflects changes in option prices due to implied volatility). Higher volatility can push options further in or out of the money, however, indirectly influencing delta.
Photo credit: iStock/PeopleImages
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN-Q125-106
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