How to Buy Shares of a Mutual Fund
Unless you are fortunate enough to have a net worth sufficiently high to give you access to an individually managed account run by an asset management company, the odds are good that you are going to do most of your investing through a pooled structure such as a mutual fund.
It's important to know how you could go about buying shares of a mutual fund once you had made the decision that you wanted to own a particular fund. By doing so, we hope to give you a broader understanding of the mechanics involved.
Purchasing Through Your Broker
If you have a brokerage account, Roth IRA, Traditional IRA, or another account at a stock broker such as Charles Schwab or Merrill Lynch, you can buy most mutual funds just like you would a share of stock. You simply go to the broker's website, walk into the nearest branch office, or call your broker on the telephone and tell them the ticker symbol of the mutual fund you want to purchase and the total amount of money you want to invest. (The ticker symbol is a short code assigned by the stock exchange to represent an investment.
If you were buying shares of Coca-Cola, for example, the ticker symbol is KO. Mutual funds, like stocks, have their own assigned ticker symbols.)
Most brokers are going to charge you a commission or other fees to buy shares of a mutual fund. Often, if the mutual fund is structured as an exchange-traded fund or ETF, they will apply the same commission that they usually do for stocks. In other cases, they will assess a flat fee, usually $49.95 or something comparable, which you can have deducted from the principal investment you intend to make or have it added so that the full principal investment gets invested. In cases of load mutual funds, commissions can run as high as 5.75 percent per annum with additional expenses.
However, in cases of load mutual funds, it is possible the load is offset by a lower mutual fund expense ratio so the investor is better off over longer periods of time, which matters if you're taking the buy-and-hold approach, but we maintain there is almost never a reason to pay a mutual fund sales load in today's world when you can find a superior or comparable product without the added cost.
It is important to note that, in some cases, your broker might have a family of proprietary funds, or a network of funds with which it is somehow affiliated, that causes them to have an incentive to get you to invest in them. To sweeten the deal, many brokers will offer these funds at no commission. In some cases, the newest rage has been to also offer what appears to be a rock-bottom expense ratio but require the underlying fund to hold a specific level of cash—say, 5 percent or so—that the fund manager effectively gets to use as a source of float, the interest income being a primary source of compensation.
Though this is largely unnoticed by investors at present due to the low-interest rate environment, were we to ever return to an interest rate environment that was more in line with historical norms, it could be a windfall for the management companies while the investors were convinced they were still paying low fees and expenses; a case of a rather brilliant accounting trick that takes advantage of the fact most people are wired to focus on explicit cost rather than opportunity cost.
Directly From a Mutual Fund Company
If you know you want to have your money invested in a specific mutual fund or in mutual funds that make up part of a larger mutual fund family, you can often open an account directly with the mutual fund itself. You fill out paperwork online, mail it in with a check (or, these days, initiate an online transfer), and tell the company whether you want to open a regular account, or a special account such as a retirement Roth IRA or Traditional IRA.
You can even set it up so that the mutual fund automatically makes investments for you by regularly withdrawing money from your checking or savings account each month. This technique, called dollar cost averaging, can be a helpful way to smooth out the average price you pay for your mutual fund shares and, as the thinking goes though there is some academic question to it, help lower the risk that you put all your money in the market at a peak, such as the day before the dot-com crash or the Wall Street meltdown that started the Great Recession in 2008.
The biggest advantage to buying mutual fund shares directly from the mutual fund company itself is that you often won't get charged a standard brokerage commission, meaning more money goes into your investments and is working for you. The downside of buying mutual fund shares directly from the mutual fund company itself is that it can be more difficult to transfer your holdings later or diversify into additional securities, including buying shares of other mutual funds offered by other financial institutions.
Through a 401(k) or Other Retirement Plan at Work
If you work at a company with more than a few dozen employees, the odds are good you have a 401(k) plan or something similar. In almost all cases, the company will let you invest in shares of mutual funds through the plan. The downside is you are likely looking at a limited menu of potential mutual fund investments, some of which may be sub-par. Nevertheless, the presence of an employer match can still make it attractive under the right circumstances even if you can't access a low-cost index fund that tracks a major stock market index such as the Dow Jones Industrial Average or the S&P 500.