Mutual Funds Come in Many Varieties. A mutual fund comes in many types and styles. There are stock funds, bond funds, sector funds, target-date mutual funds, money market mutual funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index mutual funds). The availability of different types of mutual funds allows you to build a diversified portfolio at low cost and without much difficulty.
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. Also, these mutual fund companies offer many different mutual funds with low expenses, which are measured by an expense ratio. For example, many of Vanguard’s funds have expenses below 0.30%, which is $30 for every $10,000 invested, whereas average expenses for most mutual funds are above 1% or three times that of Vanguard’s.
Mutual Funds and Poor Trade Execution. If you buy or sell a mutual fund, the transaction will take place at the close of the market regardless of the time you entered the order to buy or sell the mutual fund. I find the trading of mutual funds to be a simple, stress-free feature of the investment structure. However, many advocates and purveyors of ETFs will point out that you can trade throughout the day with ETFs. If you decide to invest in ETFs over mutual funds because your order can be filled at 3:50 pm EST with ETFs rather than receive prices as of 4:00 pm EST with mutual funds.
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.
The Basics of Mutual Fund Taxation
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. Therefore, you can meet the initial goal of getting a low-cost, diversified mutual fund when you buy index funds. For more on index funds, check out our Index Investing FAQ page. Again, 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.