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6 Best Mutual Funds Brokers

I f you’re looking for diversification, mutual funds offer a great investment opportunity. In addition to finding the right mutual funds to suit your investment goals and needs, you’ll need to pick the right broker. Here’s a roundup of six of the best mutual funds brokers out there — as well as a look at why you’d want to invest in mutual funds.

Key Takeaways:

  • Mutual funds pool money from various investors to purchase a mixed bucket of various stocks, bonds, and other securities.
  • The inherent diversification of mutual funds makes them a great choice to protect investors from risk.
  • You can find mutual funds that fit any investment goal (including both short- and long-term) and strategy.
  • You need to work with a broker to purchase mutual funds. We’ll take a look at six of the best mutual funds brokers out there.

Why Invest in Mutual Funds?

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Before we dive into finding the best brokers for mutual funds, let’s take a look at why you might want to invest in mutual funds in the first place. So, what is a mutual fund? These investment funds pool money from many investors (which can include both individuals and companies as well as other organizations) to purchase:

  • Bonds.
  • Stocks.
  • Other securities.

Investors choose to take this approach to investing because it’s really difficult to recreate this basket of different securities (known as your portfolio) by yourself.

Each mutual fund is different, so you’ll want to explore the characteristics of each to find mutual funds that are right for your investing goals. Mutual funds may be:

  • Focused on long-term or short-term growth.
  • Invested in bonds.
  • Invested in stocks.
  • Invested in a mix of stocks and bonds.

Advantages and Disadvantages of Mutual Funds

No matter your end goal, mutual funds provide one very big benefit: They’re automatically diversified. That means you’re taking on less risk thanks to the big pool of securities included in the mutual fund. Even if things don’t go well for one company included in your portfolio, others still may succeed, so the net worth (or net asset value) of the mutual fund won’t be as negatively impacted by the one company’s downturn.

Aside from that key factor of diversification, mutual funds offer some other benefits:

  • Mutual funds are managed professionally.
  • Mutual funds are liquid.
  • Mutual funds offer a range of possibilities, so it’s easy to find a fund that fits your needs for both investment horizon and risk tolerance.

However, there are some downsides to mutual funds, as well:

  • Mutual funds may have high management fees.
  • Mutual funds may lock you in for a required time period, such as five years.
  • Mutual funds may require operating expense fees that can eat into the money you make.

Mutual Funds vs. Individual Stocks

One mutual fund may be a conglomerate of individual stocks. Were you to invest in one individual stock, you’d take on a major risk. Mutual funds, on the other hand, mitigate some of that risk because you invest in a bunch of different stocks at one time. Again, the key here is diversification.

Understanding Mutual Fund Fees and Expenses

You’ll want to understand the different fees and expenses you’ll encounter when investing in mutual funds so you can choose the best mutual fund broker for your goals — and your budget.

Mutual Fund Fees

You’ll see several types of fees when you browse any brokerage’s mutual fund listings. Fees will vary from fund to fund, and the amount will depend on the broker. Before committing to any fund, make sure you read all the details and compare them.

Most funds will pay for operating fund expenses from the assets of the funds, instead of making you pay.

Typical shareholder fees for mutual funds include:

  • Account fees: These are simply maintenance fees. Account fees will vary depending on the broker you choose.
  • Exchange fees: Brokerages may charge you a fee to transfer shares into another fund.
  • Purchase fees: Purchase fees are a lot like sales load commissions as you pay them to buy shares. However, you pay purchase fees to the fund instead of to the broker.
  • Redemption fees: You pay these fees when you sell fund shares.
  • Sales loads: Sales loads are commissions you’ll pay to the broker selling you a mutual fund. Two types of sales loads exist:
    • Back-end sales loads: You pay back-end fees at the time you sell fund shares.
    • Front-end sales loads: You pay front-end fees at the time you buy the fund shares.

Typical Annual Fund Operating Expenses

You may also need to pay certain operating expenses on a yearly basis. Watch out for the details of these expenses when you’re choosing a mutual fund broker. Potential operating expenses include:

  • Distribution fees (also known as 12b-1): These fees go to the cost the fund takes on for things like advertising, marketing, and printing. FINRA puts a 0.75% cap on these fees.
  • Management fees: Management fees are typically paid out of the fund assets. They go to a fund’s investment advisor and cover the cost of managing the portfolio of that fund.
  • Other expenses: Brokers may include fees for a wide range of other expenses. Look for fees such as:
    • Accounting expenses.
    • Administration costs.
    • Custodial fees.
    • Legal expenses.

6 of the Best Mutual Funds Brokers

Once you decide you want to invest in mutual funds, you need a way to purchase those funds. That’s where brokers for mutual funds come in. Finding the best mutual fund broker requires defining your unique needs. Some mutual funds brokers are ideal for beginners, while others are great for investors on a budget, and so on. Here are some of the best mutual fund brokers (and what kinds of investors they help the most) to check out:

1. Ally Invest

If you’re looking for a low-cost option to invest in mutual funds, Ally is one of the best brokers for mutual funds in terms of low costs. You can choose from over 12,000 no-load and load mutual funds that span more than 500 fund families. Regardless of your time horizon, Ally is well known as a great option when it comes to low expenses.

Ally also leads the way when it comes to the digital experience, so while the name may not be as well known as some of the other brokers that appear on this list, it’s certainly a broker to check out if you’re looking for an intuitive online experience.

2. Charles Schwab

Charles Schwab offers an intriguing option for investors looking for no-load, no-transaction fee (NTF) mutual funds. (An NTF fund is just one that doesn’t charge the investor trading fees.)

While Charles Schwab doesn’t have the biggest list of mutual funds on this list of brokers, most of the mutual funds they do have don’t charge transaction fees. That makes Charles Schwab another great option for low-cost investing.

3. E*TRADE Financial

E*TRADE is one of the best online brokers for mutual funds if you’re looking for a wide array of tools and research capabilities. Investors have access to over 4,600 no-load, NTF mutual funds, including over 110 Vanguard funds.

You’ll have plenty of tools at your disposal to make investment decisions if you go with this platform, so it’s great for investors who want to get more involved with their investment choices. Morgan Stanley agreed to purchase E*TRADE in February 2020 but plans to operate the E*TRADE broker as a separate unit.

4. Fidelity

Fidelity is constantly named as the best mutual fund broker for beginners, and with good reason. You get connected with a huge network of resources as soon as you sign up with Fidelity, include a big research department and more than 400 analysts.

For investors looking for education and support, this mutual fund brokerage fits the bill. You see an option to call or chat with a representative on every page, and you can delve into various articles and webinars to learn more as you go. You can even filter articles based on your level of experience.

5. TD Ameritrade

TD Ameritrade is often listed as a great mutual fund brokerage for investors who want to get connected to industry-leading research capabilities. This brokerage understands what investors want in terms of research to help determine the best trades. The whole package from this brokerage includes market highlights and analyst reports from well-regarded third parties throughout the industry, including Dow Jones, Credit Suisse, and S&P Capital IQ.

6. Vanguard

Vanguard might very well be the best brokerage for mutual funds in terms of options available. The brokerage offers more than 16,000 mutual funds, including NTF funds and funds from leading fund families.

You’ll find options no matter your objectives here, with various choices available in terms of risk exposure and asset classes. With over 2,000 no load NTF funds available, Vanguard offers something for everyone.

M utual funds are a great choice for investors looking for diversification. Choosing the right broker for your investment goals and budget is just as important as choosing the right funds.

Author:Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com podcast where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share some of the wisdom needed to live a successful life.

Measuring Mutual Fund Returns

M utual funds are considered good investments for long-term investors looking to manage risk. But how do you measure the performance of a mutual fund to decide where to put your investment money? A few ways to measure mutual fund returns exist.

Key Takeaways:

  • Mutual funds are typically good for long-term investors.
  • There’s no set way to define ‘good’ mutual fund returns — good return depends a lot on a given investor’s expectations.
  • Mutual fund rates of return may not look great compared to other securities in a given year, but mutual funds tend to outperform other investment types when comparing over the long-term. As a result, mutual funds tend to make a good choice for long-term investors.

What Are Good Mutual Fund Returns?

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Mutual funds are typically designed for long-term investors. Mutual funds try to achieve consistent and smooth growth, and they usually have less volatility than the market overall. As a result, mutual funds historically underperform the market average during bull markets but outperform that market average during bear markets.

Long-term investors often turn to mutual funds because these investors have a lower tolerance for risk. A typical mutual fund investor wants to prioritize minimizing risk instead of maximizing gains when it comes to mutual fund investments.

This expectation plays a big role in understanding how to define ‘good’ returns from mutual funds. A good return has a lot to do with what the investor wants and expects to get from investing in a mutual fund. Most mutual fund investors would accept a return that more or less mirrors the overall market’s average return — and if the number exceeds that goal, they’d likely consider that a very good annual return. On the other hand, investors looking for higher return would likely be disappointed if they get that level of return on investment.

You’ll also want to consider economic conditions as well as the market’s overall performance when defining a good return on investment for mutual funds. If there’s a severe bear market, for instance, an investor would be pleased with a smaller profit than would be considered ‘good’ during more positive market conditions.

Still, there’s no hard and fast number that signifies a ‘good’ mutual fund return. Let’s take a look at a few different ways to look at mutual fund returns to better understand how to assess how a mutual fund performs over time. You’ll encounter different figures when you’re analyzing a mutual fund’s return, so it’s important to understand what each calculation means.

Annual Return

One common way of looking at mutual fund returns is annual return. You can define mutual fund annual returns as the percentage that an investment changes over the period of a year.

By calculating a mutual fund’s annual return, you can analyze that fund’s performance over any particular year that you hold that investment. Investors tend to use this calculation more frequently than other calculations as annual returns are relatively easy to figure out.

You can calculate mutual fund annual returns by first figuring out the initial price of your investment at the beginning of a holding period. Then, find the price of that investment at the conclusion of that yearlong period. Subtract the initial price from the end price to get the change in price of that investment over time. Then, divide the figure you get for change in price by the initial price.

Let’s look at an example: You have an investment on January 1 that has a stock price of $50. By December 31 of that year, the price increases to $75 — a $25 change in price. Divide the $25 by your $50 initial price to get 0.5, or a 50% increase during that year.

Annual return gives investors the total change in price during a one-year period. However, the calculation doesn’t account for the stock price’s volatility during that time horizon.

Annualized Return

Annualized return, on the other hand, is used to evaluate a mutual fund’s performance over time instead of the performance of just one year. The calculation is much more complicated, but all in all, it gives you a way to look at the full investment holding period even if it’s shorter or longer than a year. Annualized return is stated as a yearly rate of return even though it can measure a short or longer time period.

Year-to-Date Returns

You’ll hear the warning time and time again: Past returns on a mutual fund don’t predict results in the future. However, the year-to-date, or YTD, return of a mutual fund typically plays a big role in making a decision to invest money in a given fund. YTD return is the profit your security has made since the start of a given year. You’ll want to look at YTD returns for at least the past three years when deciding to invest.

Make sure you don’t confuse performance YEAR to date with performance YIELD to date. Performance yield to date involves earnings an investment generates over a defined period of time.

To figure out the YTD return, you need to know:

  • Fund price of the first day of trading of the year.
  • The number of distributions the fund made throughout that year.
  • The current share price of the fund.

Start by subtracting the value of your share price at the start of the year from your current share price. Once you get that price, you’ll add in the value of distributions such as capital gains and dividends that were made during the period of that year. Once you add distributions to the increase in share price, you can figure out the rate of return by dividing the total return by the price of the share at the beginning of the year.

Of course, this can also work in the opposite direction if your share price finishes the year lower than the price at the year’s start.

Year-to-Date Returns on a Portfolio

You can also calculate year-to-date returns on your entire portfolio. If you have a portfolio with, say, 30 individual stocks, you can calculate the YTD return of every stock using the above method.

Remember, mutual funds are created from many investors pooling their money together to invest in various securities. Mutual funds are managed professionally, but mutual fund investors can put their own portfolios together through brokerage accounts as well.

You can also calculate the YTD return of your whole portfolio. There’s one key difference, though: Instead of calculating the value of the share price from the beginning of the year, you’ll add the total value of your portfolio on that date. Then, you can add up the current value of your portfolio and subtract that amount from the amount you have for the beginning of the year.

How Do Returns on Mutual Funds Compare to Other Types of Investments?

There are various categories of mutual funds. Overall, annualized mutual fund returns in a given year tend to come out below the average of other types of investments. However, if you take a longer-term perspective, you’ll find that mutual funds generally both outpace inflation and outperform various other kinds of investments. Using long-term analysis, mutual funds may even outperform things like United States Treasury bonds, CDs (certificates of deposit), and gold.

In other words, when you’re looking at the return of mutual funds, long-term annualized returns can provide a more reasonable expectation (if not prediction) than short-term returns, as short-term returns tend to be more volatile.

Mutual Funds With the Best Returns in the Past Ten Years

Looking for some investment inspiration? Here are some mutual funds and exchange-traded funds that have ranked high on lists of the best returns over the past ten years:

  • American Funds American Balanced A (ABALX).
  • American Funds Capital Income Builder A (CAIBX).
  • American Funds Capital World Growth & Income A (CWGIX).
  • American Funds Europacific Growth R6 (RERGX).
  • American Funds Fundamental Investor A (ANCFX).
  • American Funds Growth Fund of America A (AGTHX).
  • American Funds Income Fund of America A (AMECX).
  • American Funds Investment Company of America (AIVSX).
  • American Funds New Perspective A (ANWPX).
  • American Funds Washington Mutual A (AWSHX).
  • Fidelity Contrafund (FCNTX).
  • Invesco QQQ Trust (QQQ).
  • iShares Core US Aggregate Bond ETF (AGG).
  • iShares Core S&P 500 ETF (IVV).
  • SPDR S&P 500 ETF Trust (SPY).
  • T. Rowe Price Blue Chip Growth (TRBCX).
  • Vanguard 500 Index Admiral (VFIAX).
  • Vanguard Total Bond Market II Index Investor (VTBIX).
  • Vanguard Total Stock Market Index Admiral (VTSAX).
  • Vanguard Wellington Admiral (VWENX).

A ny investment decision should take both the time frame of the investment, the purpose of the investment, and an assessment of risk tolerance into account. If you want to invest in order to build wealth over a longer time period, a strategy designed to outpace inflation may be what you need. Mutual funds can be a great way to achieve that.

Author:Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com podcast where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share some of the wisdom needed to live a successful life.

Pre-IPO Stocks: What They Are and How To Get Them

W ondering how to get pre-IPO shares? You’re not alone. These intriguing investment opportunities can be hard to come by if you’re not connected with a company about to go public. However, there are some ways you can get in on the action. Just keep in mind that along with the potential for huge and quick profits, pre-IPO stocks come with significant risks.

Key Takeaways:

  • An IPO happens when a company first goes public and shares stock in the open market. Pre-IPO stocks are shares that certain investors hold before the IPO happens.
  • It can be difficult to buy pre-IPO shares unless you’re closely connected to a company, but some methods exist for investors who want to look for ways to buy pre-IPO stocks.
  • The big advantage of pre-IPO stocks is the potential for the ‘first-day pop,’ which happens when a stock makes huge gains on its first day of trading.
  • Buying shares pre-IPO comes with considerable risks. In addition to a general lack of information before a company goes public, there’s no guarantee that stocks will continue performing well — even if they do experience that initial ‘pop.’

What Are Pre-IPO Stocks?

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An IPO, or initial public offering, is the time when a company first goes public, selling shares from its stock in the open market. Pre-IPO stock, then, is stock that companies offer before going public.

An IPO is underwritten by one of three main sources:

  • An investment bank.
  • A broker-dealer.
  • A group of broker-dealers.

The entity underwriting the IPO purchases shares from a company. Then, that entity sells and distributes shares to investors at the IPO. Up until the moment the IPO happens, a company remains private.

Private companies often offer pre-IPO stock in order to raise extra funds before going public. Since the pre-IPO buyer won’t know how the stock will perform once the IPO happens, there is a risk that the stock underperforms, resulting in potential losses.

What Is Pre-IPO Placement?

If you’re looking into buying shares pre-IPO, keep in mind that a big piece of pre-IPO share selling happens in pre-IPO placement. A portion of IPO stocks are given to private investors just before the IPO is about to hit the market when the IPO is made public.

Most private investors who engage with pre-IPO placement either have private equity or large hedge funds, allowing them to invest in a big stake in the company. Because these private investors take on a big part of the company’s investment, they often pay a lower price for pre-IPO shares than the IPO’s prospective price.

Pre-IPO placements usually happen when there’s a big demand for a pending IPO. This demand can occur because of the IPO placement’s price per share, with risk depending on the company going public with shares. The pre-IPO placement makes up for the risk by offering a lower per-share price than the expected price the IPO will offer. The risk usually comes from the potential for low post-IPO demand, which can decrease the price of the shares.

How to Buy Pre-IPO Shares

It isn’t always easy to buy stock before an IPO. Investing in these shares can often only happen if you know the right people. Investors who have the opportunity to buy shares pre-IPO most often include:

  • Company employees.
  • Company management.
  • Family and friends of the company.
  • Hedge funds.
  • Investment banks.
  • High-net-worth clients.
  • People with huge accounts with the broker that will bring the company public.

Even if you do fall into one of those categories, it’s no guarantee that you’ll be offered the chance to buy pre-IPO shares. The hottest IPOs usually have huge interest (think: LinkedIn’s IPO), and unless you’re very closely linked to the company, it can be really tough to get in.

That said, buying pre-IPO stock is not impossible. A few methods for getting the chance to invest in pre-IPO shares exist, including:

  • Developing business connections: You can make connections at events like business incubators or venture forums. You can also establish relationships in angel investor communities.
  • Monitoring the news and alerts: Look for news about companies that plan to go public or even startups. You can ask about companies looking for investors by speaking with local accountants and bankers as well.
  • Working with a stockbroker or advisory firm: Stockbrokers and advisory firms specializing in capital raisings and pre-IPO shares offer one of the most common ways for investors to get started with buying pre-IPO stocks. They can give instructions about how to invest in pre-IPO stocks before a company goes public.

When Can You Sell Pre-IPO Stocks?

One of the biggest draws of purchasing stocks before an IPO is the potential to make big profits, usually on the first day of trading. If you buy IPO stocks, they’re generally held with a brokerage account. You can sell them at pretty much any time by phone or online. You also can usually place a limit order, setting the price and number of shares you’d like to sell. You should keep in mind that you’ll likely owe your broker commissions.

If you make a profit from shares you hold for less than a year from your date of purchase, those profits are typically taxed as ordinary income. This rate is usually higher than the rate for long-term capital gains.

The Benefit of Buying Pre-IPO Stocks

Investors try to buy pre-IPO shares because they can be incredibly lucrative. The biggest way pre-IPO stocks lure in investors is with the potential for a huge increase on the first day the stocks are traded publicly. You might hear this referred to as the ‘first-day pop.’ For example, when LinkedIn started trading publicly in 2011, the company’s shares rose a whopping 109% on the first day.

Risks When Buying Pre-IPO Stocks

Investing in pre-IPO shares can include risks that go beyond typical investment risks. With a company that has been public for a longer time, you can more easily look at stock charts and analyze the trajectory of the business’s growth. That’s not possible pre-IPO stock.

Risks that come with pre-IPO investments include:

  • Lack of information: When it comes to pre-IPO shares, it can be much more difficult to evaluate a company’s future due to what’s known as information asymmetry. When managers and directors sell their shares as pre-IPO stocks, they know much more about their own company and the situation it’s in than the people who are buying into the company. Managers and directors are not required to disclose information to the public while a company is still private. This automatically limits the amount of information you’ll be able to find on the company.
  • Increased price: Underwriters who complete the sale have an incentive to maximize the price they can secure in the secondary market.
  • Difficulty selling: Shares purchased before an IPO are much harder to sell before stocks start publicly trading.
  • No price guarantee: The first-day pop with an IPO certainly is the stuff of legends. However, even if a stock performs amazingly well on that first day, that’s no guarantee for the stock’s continued performance. Even some of the biggest IPO performances in recent history haven’t completely lived up to expectations after an initial honeymoon period. Consider big names like Spotify, Twitter, and Facebook. Those companies all saw their stocks fall substantially after their debut. Only Facebook manages to consistently surpass its IPO price.

G etting in before an IPO may sound like the ticket to immediate riches. Even if you can get access to one of these events, you’ll want to be wary of the big risks IPOs can pose.

Author:Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com podcast where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share some of the wisdom needed to live a successful life.