How Do I Buy a Mutual Fund? Mutual funds are primarily bought in dollar amounts unlike stocks, which are bought in shares. Mutual funds can be purchased directly from a mutual fund company, a bank, or a brokerage firm. Before you can start investing, you’ll need to have an account with one of these institutions prior to placing an order. A mutual fund will be either a “load” or “no-load” fund, which is financial lingo for either paying a commission or not paying a commission. If you are using an investment professional to assist you, you will likely need to pay a load.
Mutual Funds Lack Liquidity. How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and closed-end funds? If you sell a mutual fund, you have access to your cash the day after the sale. ETFs, stocks and closed-end funds require you to wait three days after you sell the investment. I would call the “lack of liquidity” disadvantage of mutual funds a myth. You can only find more liquidity if you invest in your mattress.
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In a mutual fund, the value of your shares goes up and down as the value of the stocks and bonds in the fund rise and fall. For the average investor to have the same exposure to those investment options and potential profits on their own would be extremely costly both in terms of the actual investment dollars and in terms of time. Additionally, investing in a mutual fund is generally a cost-effective way to gain access to professional money management. Were you to try and invest in individual securities and actively manage them the way a mutual fund’s manager does, it could very easily become a full-time job. In order to make wise investment decisions when you buy individual stocks and bonds yourself, at the very least you’d have to have the knowledge to do extensive research on various types of businesses in general (automobile, construction, medical) and on specific companies (GE, IBM, Microsoft).
Mutual Funds Are Accessible. Many mutual fund companies allow investors to get started in a mutual fund with as little as $1,000. Schwab’s mutual fund family has a minimum of $100 for many of their mutual funds. And since mutual funds can be easily traded, the combination of low cost and ease of use makes them accessible. Systematic Investing and Withdrawals with Mutual Funds. It’s simple to take advantage of systematic investing with mutual funds. Many mutual fund companies allow investors to invest as little as $50 per month directly into a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service.
Mutual Funds Are Diversified Investments. The nature of mutual funds as pooled investments that are professionally managed means that investors generally can easily accomplish one of the most important standards of smart investing — diversification. To diversify means to spread market risk by holding a variety of several different securities, rather than just a few. Most mutual funds invest in dozens or hundreds of stocks or bonds within one portfolio. Depending upon the type of fund, this accomplishes the fundamentals of diversification with as little as one or two mutual funds. However, when building a portfolio of mutual funds, especially as investment assets and objectives grow more complex over time, investors are smart to diversify across several funds in different categories.