How to Buy Mutual Funds

R ecognized as one of the quickest and easiest ways for investors to diversify their assets, mutual funds are a useful way to invest and often serve as the foundation of an investor’s portfolio. In order to reap the benefits of a mutual fund, you need to know how to buy them. Though we’re not stockbrokers or advisers and we don’t make recommendations, it’s important to educate yourself on the ins and outs of an investment vehicle before putting your hard-earned money on the line.

Here we’ve compiled answers to all of your basic questions regarding mutual funds: what they are, how they benefit your portfolio, how you can buy mutual funds, and what it means to rebalance your portfolio.

Key Takeaways:

  • Amutual fund is an investment vehicle through which investors collectively purchase assets.
  • With their diversification, simplified portfolio management, and low trading costs, mutual funds particularly benefit new and cost-conscious investors.
  • Mutual funds can be purchased in four easy steps: choosing your level of involvement, determining your budget, knowing where to buy mutual funds, and finally purchasing them.
  • Most successful mutual fund investors rebalance their portfolio once a year.

What Is a Mutual Fund?

A mutual fund is an investment program in which investors pool their money to purchase a group of assets typically overseen by a team of investment professionals.

Mutual funds can be made up of stocks, bonds, commodities, money market accounts, and more, all centered around the fund’s defined objective. In this way, with one purchase, any investor can equip their portfolio with a well-diversified, expert-vetted asset.

How Mutual Funds Benefit Investors

Because of the diversification among their assets, mutual funds are perfect for first-time investors and those looking for a smart addition to their portfolio. Mutual funds also have relatively low trading costs in addition to allowing you to share those investment expenses. This makes mutual funds a smart choice for cost-sensitive investors, too.

In some ways, mutual funds supply investors with a relatively hands-off way to get into the market and generate income over time as they are easy to track and come with simplified portfolio management. Mutual funds also provide an easier way to invest in specialized market sectors. Finally, with the way they’re run, mutual funds benefit their investors by granting them access to professional financial managers.

Investors interested in these advantages can begin the process of purchasing mutual funds for their portfolio.

How to Buy Mutual Funds

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Though mutual funds used to be available only through financial professionals such as planners, brokers, or money managers, the process of purchasing mutual funds has since become more accessible through online investment platforms. To help get you started, here we break down investing in mutual funds into four easy steps:

1. Choose Your Involvement

No matter what investment vehicles interest you, ask yourself how much time, effort, and money you’re able to commit to this investment to determine:

  • If mutual funds are right for you: If you’d rather have greater control over each of the assets in your portfolio, researching and purchasing individual stocks might better suit your objectives. This may also be the case if you’re a more experienced investor and already have a solid foundation of funds.
  • If you’d like to use a robo adviser: A robo adviser is a digital AI that collects information about your portfolio investing preferences and uses its understanding of the market to find assets that serve your financial objectives. Many brokerages offer this service for an additional fee, but this virtual adviser can lessen the time you need to pick investments.
  • How important expert management is to your financial goals: This can help you decide between actively managed or passively managed funds. Investment professionals oversee actively managed funds, conducting the bulk of the research and watching trends to compile and supervise an array of assets with the potential to produce a profit. In this way, actively managed funds are best if you want this kind of support.
  • If you should budget for a financial adviser in your investment funds: Professional help comes with an added expense. At times, it can also bring added risk as professionals in charge of mutual funds often strive to beat the market, which isn’t easy or cheap. Understanding this now can also give you extra time to set aside funds to pay a professional if you want one.

Use your answers to these questions to help you set up a more relevant budget.

2. Determine Your Budget

When it comes to negotiating your investment budget, there are a few factors to consider:

  • How much money you would be willing to part with to earn a profit: At the very least, investors should plan to leave their investment untouched for five years in order to budget for any fluctuations in the market. Those with the patience and time frame to invest aggressively may find themselves comfortable with investing more. Older or more conservative investors may prefer to start with a lower budget.
  • Investing minimums:You also want to account for the fact that many mutual fund providers have a minimum amount required to even open an account. This can often range between $500 and $3,000, depending on the brokerage.
  • Additional fees: Understand what other fees you have to pay, including those associated with transactions, account maintenance, and financial advisory costs. This can help you have a better idea of how much you should really budget for investment to achieve your desired outcome.

When you’ve established your desired budget, you’ll then research where you want to buy your mutual funds.

3. Know Where to Buy Mutual Funds

The world of investment offers four main places to buy mutual funds:

  • Online brokerages: An online brokerage operates from the internet and provides investors with a platform through which to trade various securities, including mutual funds. Because these brokers conduct all buy and sell orders online, their investors have the freedom and convenience to manage their investment from anywhere. With few bricks-and-mortar branches to maintain and therefore reduced operating costs, online brokerages are often able to offer investors the cheapest prices of the institutions, making them ‘discount brokers.’ While online brokers don’t always include investment advice or analysis, they’re a great fit for money-conscious investors and those who prefer to do their own research.
  • Full-service brokerages: These financial institutions offer everything online brokerages do and more, including regular portfolio updates, investment advice and analysis, and financial planning. With a full-service brokerage, you’re always interacting with another human being who provides personalized advice. With this comes the option to place buy and sell orders over the phone or even in person if you find one a brokerage with a branch near you. Full-service brokerages cater to investors who seek the oversight of a financial professional when conducting their investment process.
  • Investment companies: Often known as a fund company or fund sponsor, these trusts or corporations deal exclusively in funds and include smaller-scale specialized firms and larger publicly traded companies. They typically offer a handful of funds on both ends of the spectrum, such as passively managed index funds or actively managed equity funds. Though they offer fewer funds than brokerages, you’re likely to get a better rate than you would through a full-service broker because you’re buying directly from the company that owns and manages the fund. Those looking to invest solely in mutual funds should research investment companies offering funds in their fields of interest.
  • Financial service companies: These are essentially investment companies with the additional option of using an in-house account to buy funds offered by other firms. Note that, to encourage investors to buy the funds that the company owns and operates, competitor funds may come with additional fees. Investors who like the sound of investment companies but prefer a little more variety in their options may choose to purchase their mutual funds through a financial service company.

In researching available platforms, keep in mind that not all options offer every kind of mutual fund you may be interested in. For example, target-date funds adapt with their investors by reassessing the mix of assets as its investors age. For this reason, older investors or those who would like more guidance may want to select a purchasing platform that offers these target-date funds.

4. Purchase Funds

Depending on where you’ve elected to buy your mutual funds, you can conduct your purchase online, over the phone, or in person.

To do so, you’ll need to know how much you would like to invest and the name of the mutual fund you’re interested in buying. Unlike stocks, mutual funds are generally bought in dollar amounts. The previous day’s closing share price decides this amount. You’ll want to take this price into account in deciding when you make your purchase.

Once you’ve placed your buy order, you’ll then be the proud owner of a mutual fund!

Rebalancing Your Portfolio With Mutual Funds

N ow that you understand the basics of purchasing a mutual fund, you’ll want to research strategies for managing your investment. Many seasoned investors rebalance their portfolio once a year. Rebalancing involves adjusting their investments after major changes to the diversity of their assets such as investment gains. However investors choose to manage their new funds, they should always conduct thorough research in order to make educated investment decisions.