Contents
Mutual Fund Basics
Why Invest in Mutual Funds?
Mutual Fund Returns
Types of Mutual Funds
Mutual Fund Investment Holdings
Funds vs. ETFs, Stocks, and Bonds
How to Plan a Mutual Fund Portfolio
How to Research Mutual Funds
How to Buy Mutual Funds
|
 |
 |
 |
|
How to Buy Mutual Funds
Once you’ve researched and selected mutual funds, you can set up an account and start buying the funds.
Mutual Fund Providers
To set up a mutual fund account, you’ll need to work with a mutual fund provider. Investors buy mutual funds through four main sources.
Fund Companies
A fund company is a large investment institution that sells mutual funds directly to individual investors who maintain investment accounts at the institution. Fund companies typically offer their own mutual funds as well as funds offered by outside firms. Investors can usually buy and sell the firm’s proprietary funds with no commission, or fee, though buying or selling an outside firm’s funds will typically incur a commission of at least $25 or so. You can buy or sell funds online or over the phone.
Some of the most popular fund companies include:
- Fidelity Investments: www.fidelity.com
- Franklin Templeton: www.franklintempleton.com
- T. Rowe Price: www.troweprice.com
- Vanguard Group: www.vanguard.com
Financial Advisors
A financial advisor provides investment advice and, in some cases, can buy investments on your behalf, usually within an account you’ve set up at a fund company. Financial advisors typically charge a commission equal to a percentage of your account’s total value, in addition to any fees charged by the fund company.
Brokers
A broker buys and sells investments for individuals. Most brokers work for financial services firms, such as Merrill Lynch or Charles Schwab, though some work independently. Brokers usually charge a commission for each transaction they execute on your behalf.
401(k) Plans
Many employers allow employees to invest pre-tax dollars in a retirement account known as a 401(k). Most 401(k) plans invest exclusively in mutual funds, though some also allow employees to buy company stock. Companies typically work with a large fund company, which then creates accounts for employees and offers a selection of their proprietary funds as investment choices.
If you’re comfortable making your own financial decisions, the most cost effective way to buy mutual funds is to join your company’s 401(k) plan and/or open an account at a major fund company and buy and sell funds yourself. If you’d prefer the assistance of a professional, work with a broker or financial advisor through a financial services firm.
Mutual Fund Accounts
Starting a mutual fund account is much like opening a bank account—you choose a provider, complete an application, and hand over a check. Minimum investment amounts range from $250–3,000, and account paperwork generally requires you to provide the following information:
- Personal information: Name, address, phone number, social security number, and so on
- Account owners: The names of the individuals who will own the account, such as you and your spouse
- Account type: Retirement account (such as 401(k) or IRA) or general investing account (a taxable account)
- Funds: Names of the specific funds you’d like to buy
The initial deposit you make into your account can be used to buy specific mutual funds or a money market fund. Investors often use money market funds to “park” their money while deciding which mutual funds, or other investments, to buy. Once you begin to buy mutual funds, you’ll receive regular account statements in the mail or by email that show the number of shares you own and their current value.
How to Fund Your Account
Whether you’re making an initial deposit or adding funds later, there are several ways to put money in your account:
- By check: Write a check and mail it directly to the fund company, or give it to your broker or financial advisor.
- Bank transfer: Authorize a direct instant transfer of funds from your checking (or other bank account) to your mutual fund provider.
- Automatic purchases: Sign up with your fund provider to make regular deposits into your fund account from your bank account or paycheck.
Setting Up and Funding a 401(k)
The steps required to set up and fund 401(k) plans differ slightly from those required to establish a standard mutual fund account. When establishing your 401(k), you will most likely have to make choices in these three areas:
- Investment choices: Most plans limit your choices to funds from a particular provider, or to one fund that contains only the company’s stock. Don’t participate in plans that only allow you to buy company stock. If you’re limited to funds from just one fund provider, research those funds closely, keeping in mind that funds with high dividends, interest, and capital gains tax liabilities are okay since 401(k)s are tax-exempt.
- Contribution rate: Your employer will ask you to specify a rate (expressed as a percentage) of your paycheck to contribute to your 401(k) account during each pay period. Most employers allow for a wide range of percentages as long as your total annual contribution amount does not exceed the limits set by the federal government. Once you set your contribution rate, your employer will begin deducting that percentage from your paycheck and depositing it directly into your fund account.
- Employer match: Many employers encourage employees to contribute to 401(k) plans by matching employee contributions. The amount that an employer matches varies widely and is rarely a one-to-one match. Any amount of employer matching is a boon since the employer is essentially giving you money by contributing additional funds your 401(k) for free.
Minimum Balance Requirements
In addition to minimum initial investment amounts, many funds require you to maintain a minimum balance. If your account falls below this balance (due to withdrawals or changes in market value), the fund provider charges a fee.
Closed Funds
A closed fund is different from a closed-end fund. If a fund grows popular and receives an overwhelming amount of recent investments, it may choose to close and no longer accept investments from new investors. A fund manager will close a fund if he or she believes the fund has too much money coming in for its own good. Some closed funds reopen to new investors eventually, but others remain closed permanently. If you own a fund that closes, you usually retain the right to purchase more shares, even if outsiders in the general public cannot.
| Acknowledgments & Disclaimer |
