Simple Guide for Buying Mutual Funds
All You Need to Know to Get Started Investing in Mutual Funds
If you want to know how to buy mutual funds, there are only a few steps to take before getting started on your saving and investing goals. This guide on buying mutual funds will walk you through the purchase of your first fund and on to building a complete portfolio of funds that is best suited for you and your goals.
Choosing the Place to Buy Mutual Funds
Although you can buy mutual funds through a discount broker, such as Charles Schwab, the best way to buy mutual funds is through a mutual fund company. But you don't want to start with just any mutual fund company. Before investing, you'll want to do a bit of research to find a reputable firm that has a broad selection of low-cost, high-quality mutual funds.
Look for mutual fund companies with a selection of no-load funds with low expenses:
- No-load funds: Start your research with one of the best no-load mutual fund companies, such as Vanguard, Fidelity, and T. Rowe Price. No-load mutual funds don't have sales charges, called loads, which can be as high as 5.75% of the purchase. Therefore, when buying no-load funds, you're buying shares without paying loads.
- Low expenses: No-load mutual fund companies offer many different mutual funds with low expenses, which are measured by an expense ratio. For example, the average mutual fund expense ratio at Vanguard is 83% less than the industry average .
Minimum Initial Mutual Fund Purchase
Most mutual funds have what's called a minimum initial purchase, which is the amount you'll need to have saved prior to buying shares of your first fund. Most mutual fund companies have a minimum initial purchase requirement. For example, most of Vanguard's mutual funds have a minimum initial purchase requirement of $3,000. Fidelity funds offer their funds with no minimum initial purchase.
In preparation for making the first purchase of a mutual fund, you'll need to save enough to cover the minimum, if the mutual fund company has a minimum. However, once you make your first purchase, subsequent purchases of the same fund are usually as low as $100.
Opening an Account to Buy Mutual Funds
If you don't already have an investment account at a brokerage firm or mutual fund company, you'll need to open one before you're ready to make your first purchase. Opening an account doesn't require money; all you need to do is choose the company where you'll invest and follow their account opening procedures.
Opening an Account is Easy
Opening an investment account is incredibly easy at most mutual fund companies and brokerage firms. The easiest way to open an account is online. Information required will include things you already know, such as your name, address, date of birth, and social security number.
Choosing Your Account Type to Invest
You'll also need to know which type of account is best for your investing needs. Here are the basic account types and how they work:
- Individual Brokerage Account: This is a regular brokerage account established for an individual (one person). Contributions are not tax-deductible, and investors pay taxes on capital gains and dividends. For more on this, see this article on taxation of mutual funds.
- Joint Brokerage Account: This works the same as an individual brokerage account, except there are two account holders, such as spouses.
- Individual Retirement Account: Also called an IRA, qualifying individuals can make contributions that are not taxable. Growth is tax-deferred, which means that account holders don't pay taxes until withdrawals are made.
- Roth IRA: This is an individual retirement account that is funded with after-tax dollars, which means contributions are not tax-deductible, as with the traditional IRA. However, growth is tax-deferred and qualified distributions (withdrawals) are tax-free. For more on the Roth and the traditional IRA, see this article on how IRAs work.
Best Types of Mutual Funds for Beginning Investors
Whether you are just getting started investing or wanting to build a portfolio from the bottom up in the best way possible, there are a handful of outstanding mutual funds to get the job done. Choosing the best mutual funds is much more than buying the best performers of the past year.
Instead, investors are wise to know their investment objectives and future plans and prepare for a long-term strategy. For example, if you're saving for retirement, it's likely your time horizon is more than ten years. It means you can afford take more risk, which essentially means you will likely have more of your investment assets allocated to stock funds than bond funds.
Here are some of the best types funds to start a long-term portfolio:
- S&P 500 Index Funds: Index funds can be a great place to begin building a portfolio of mutual funds because most of them have extremely low expense ratios and can give you exposure to dozens or hundreds of stocks representing various industries in just one fund. As their name suggests, index funds simply hold the same securities that are found in an index. S&P 500 Index funds invest in approximately 500 of the largest U.S. companies. Index funds are passively managed, which means their primary objective is to mirror the holdings and performance of an index and therefore costs to operate these funds are extremely low. Mutual fund companies like Vanguard, Fidelity and T. Rowe Price are good places to find the best index funds. You can also look at Charles Schwab.
- Balanced Funds: Also called hybrid funds or asset allocation funds, these are mutual funds that invest in a balanced asset allocation of stocks, bonds, and cash. The allocation usually remains fixed and invests according to a stated investment objective or style. For example, Fidelity Balanced Fund (FBALX) has an approximate asset allocation of 65% stocks and 35% bonds. It considered a medium risk or what industry experts might call a moderate portfolio. Vanguard also has an outstanding index balanced fund, Vanguard Balanced Index (VBIAX), which is suitable for investors looking for moderate risk. Balanced funds can be ideal for beginning investors because they are well-diversified and can, therefore, be used as stand-alone investments or as core holdings to begin a larger portfolio.
- Target Date Mutual Funds: Target date funds invest in a mix of stocks, bonds, and cash that is appropriate for a person investing until a certain year, which is usually retirement. As the target year approaches, the fund manager will gradually decrease market risk by shifting fund assets out of stocks and into bonds and cash, which is what an individual investor would do themselves manually. Therefore, target-date mutual funds are a type of "set it and forget it" investment that doesn't require ongoing management. For example, if you are saving for retirement and think you may retire around the year 2035, a good choice for you might be Vanguard Target Retirement 2035 (VTTHX).
Buying mutual funds can be simple but investors should be careful to choose the right investment company and the best funds to suit their individual goals. Once you choose your first mutual fund, you'll have the foundation started. You can then build upon that foundation by purchasing more shares of this fund and eventually add more funds for greater diversity.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.