How to Buy Mutual Funds

Learning how to buy mutual funds is a critical process for the amateur investor who looks to take advantage of the market without having great knowledge of financial markets or spending extensive time trading. Mutual funds allow investors to buy a preselected basket of stocks, bonds and other financial instruments collected neatly into a single security. These funds have the added benefit of being managed by knowledgeable professionals, which allows an investor to hold the fund for long periods without micromanaging her portfolio.

Which Account to Use

A growing number of employers offer a 401(k) plan instead of a pension. An investor with a 401(k) should contribute at least as much as her employer matches and choose among the no-fee funds offered within the plan. Mutual funds can also be purchased in individual retirement accounts (IRAs) or brokerage accounts. The primary difference in buying mutual funds in these accounts is whether taxes are deferred or paid yearly.

Which Funds to Buy

Whether you are investing through a 401(k) or a personal account, choosing which funds to add to your portfolio is a significant decision. A 401(k) is likely to have a more limited selection than an IRA or brokerage account, but a well-diversified and targeted portfolio should be possible nonetheless. The type of fund you purchase should reflect your goals. Some funds are designed for capital growth but are riskier, some are designed for dividends but do not offer large returns, and some are managed toward a target retirement date for you. A basic tenet in investing is that riskier investments are a better choice when you have more time until you need to cash out. For this reason, younger investors are advised to purchase funds with mostly stocks, and older investors are advised to purchase funds with mostly bonds since stocks are riskier. Additionally, one of the safest long-term strategies is to buy an index fund that is passively managed and seeks only to mimic the overall trend of the market. You should reconsider your goals each year and rebalance your portfolio to match your current needs.

Fees, Expenses and How to Avoid Them

If you select a handful of funds at random, they are likely to have different total costs associated with trading. The most actively managed funds will generally have higher expense ratios. The expense ratio is the value of the fund that is dedicated to paying management and other costs. A high expense ratio may indicate that there are more favorable funds available since the money used to pay management is taken out of potential returns to you. You may also need to pay trading fees when buying and selling funds, depending on the custodian of your account. It is generally wise to invest in funds that are inside your custodian’s network because they usually can be traded without fees. An investor looking to trade mutual funds is recommended to have an account with at least one of the three largest investment fund providers because of the huge selection of different no-fee funds that each offers. Otherwise, you may be charged a transaction fee of around $35 per trade, and that money can quickly diminish returns. A good strategy may be to research which funds you want to buy and open an account with the group that offers it with no transaction fees.