How to Buy Mutual Funds

How to Buy a Mutual Fund

11 comments

in Cornerstone Series,Investment

So it’s time. You’ve decided you want to start investing, either for retirement, your kids college, or merely to start making your money work for you. The first question is how do I actually buy a mutual fund? Well hold on, let’s back up a bit and first look at briefly what is a mutual fund? Then we’ll dive in to actually investing in mutual funds.

What is a Mutual Fund?

Having talked to a variety of people on the topic of mutual funds I know there are a lot of misconceptions about what they really are, and hopefully we can simply get to the answer. For our discussion a mutual fund is merely a collection of various investment options all packaged in one handy purchasable item. The biggest benefit of a mutual fund is that it provides you with an easy way to invest in multiple baskets. You’re savvy, you know that you don’t want to put all your eggs in just one stock or a bond. Purchase mutual funds that cover a large range and you’ll automatically be diversified. The benefit to you is that a fund manager (if there is one) will take care of all the re balancing and purchasing for you and gives you one handy stock ticker symbol to follow. All the various mutual fund investors pool their money together and purchase the investments in the fund. So you’ll be part owner in all of those various investments. I know this is oversimplifying it quite a bit but in a nutshell that’s what makes up a mutual fund. This is also a great way to invest in areas you might not be able to normally. Can’t afford a share of Berkshire Hathaway at $108,000 a share? You could own 1/432nd of a share in your chosen mutual fund.

What type of investments are in Mutual Funds?

You are not just limited to stocks in a mutual fund, in fact your choices can sometimes be overwhelming. Take a look at some of your choices:

  • Equities (stocks)
  • Bonds
  • Money Market Instruments
  • Balanced Funds that invest in Stocks and Bonds
  • Fund of Funds. Stocks, Bonds, and Money Markets all rolled into one. Varieties include Lifestyle funds that change investment types over time usually from more aggressive to conservative.

How to Choose a Mutual Fund

We’ll cover this topic in more detail in the comings weeks as this is well beyond one post. If I was put on the spot and told to pick one mutual fund to invest in today I would pick and Index Fund. An Index fund is a collection of investments organized to mimic an Index like the Standard and Poor’s 500. These funds typically beat out 80% of the other mutual fund types. There fees are very low because you’re not paying for a high price fund manager who’s constantly swapping investments, rather you are targeting the index, that means more interest to you. Again we’ll cover this in the near future if you are floundering and hopefully we can point you in the right direction.

How to Buy a Mutual Fund

Okay you know what you’re looking for but how do you go about actually investing? It’s pretty simple to get going especially if you are comfortable doing things Online. There are a bunch of options with regards to brokers. My personal choice would be and is Scottrade. Trades are just $7 for single stocks, mutual funds can vary from nothing to $17 depending on the type, and it only takes $500 in your account to get going. Their interface is great and gives you any choice of investment type you could want, currently over 14,500 mutual funds. Whether you want to make your investments in an IRA, a Coverdell or just as a straight taxable investment you can do that.

If you are not comfortable Online you can talk to a financial advisor or broker locally. Scottrade has some local offices but I can’t comment on how their service is because I’ve never actually used a local office. You’re bank or credit union can frequently help in this department but it’s not really their core competency and I would walk cautiously. Be careful here and never, I mean never invest in anything you do not understand. If the advisor can’t explain to you in simple terms the investment and why it’s a good option, head on out the door. You’ll often have a variety of fees tacked on for the pleasure of talking to a person so take that into account if you are only looking at investing small amounts of money to start you’re better off sticking online. A friend of mine and a Certified Financial Planner Jeff Rose has an excellent post on finding a good financial planner. But I want to put in a strong caveat that you absolutely can do this yourself and manage your own money. Don’t ever just release the reins you should know where your money is going, because after all it’s your money and no one will care about it as much as you do. Happy Investing to you!

(Photo Courtesy epicharmus)

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{ 7 comments… read them below or add one }

Kevin 2010/06/01 at 7:14 am

You’re last point about not releasing the reins is so important. There’s a human tendancy that once we turn a function over to someone else–especially an “expert”–that we can forget about it and live happily ever after. If only that were true.

At a minimum, you have to be monitoring closely at the beginning to make sure the financial planner’s actions are matching your objectives. Everything can sound just fine and dandy when you’re meeting over lunch to discuss objectives, but that fact is never truly established until activity begins.

This isn’t a rap against financial planners, but rather a reminder that no one is or will be more responsible for your money than you will.

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paul 2010/06/01 at 9:09 am

Exactly right Kevin. As a general rule I’m not trying to portray Financial Planners as evil or money lovers but like any professional there are good and bad advisors. It’s just like real estate, when you get the right agent it makes all the difference in the world. With investing it’s easy to think there is no way you can do it on your own and you absolutely can. There was a great article in the Seattle Times on Sunday about Verna who started investing when she was 67 and when she passed away last week she had saved over 4.5 Million dollars. If anything it’s a wonderful story, but should be a further catalyst that you too can be an investor.

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Kevin 2010/06/01 at 10:38 am

100 years ago (OK, slight exaggeration) my father was sharing a hospital room with a gentleman who probably was about 75 at the time, and when Dad asked him what he did for a living, he answered “I’m an investor”.

He went on to explain that he’d lost his job at least years earlier, wasn’t employable anywhere, and decided to hunker down and learn investing as a last ditch attempt at financial respectability. He said it was hard at the beginning, and he lost on his share of trades, but he did learn it and had done quite well for himself.

So I think investing is like anything else, it’s a skill to be learned and mastered. But it does require more than a casual approach. Easy money it isn’t.

Bill 2010/06/02 at 3:59 pm

Just a couple of simple tips:
If you hire a finacial advisor, make sure he or she get their cut out of what they increase your money with, not and I repeat not out of fees you pay on a regular basis.
If you have to pay a commission to buy a mutual fund, don’t I repeat don’t ever pay for the oppoutunitty to lose your money. There are too many good funds that do not come with a front end or back end load. ABOVE ALL REMEMBER EVERYONE AND I MEAN EVERYONE IN THE INVESTMENT COMMUNITY ARE SALES PEOPLE, NOT YOUR FRIEND, BUT SOMEONE ENGAGED IN SELLING FOR A LIVING, you know, like a corner used car lot. Good luck to all and remember it is YOUR responsibility to watch over YOUR nest egg.

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paul 2010/06/02 at 4:31 pm

Bill you are sooo right on that one.

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James 2010/06/08 at 1:12 pm

An easy tip on picking funds is to pick up a Money magazine and flip to the back section. in this area you will find not only stocks but also top mutual funds that they track.

what i would suggest is to buy a few of these magazines and start to track/research these funds before you make any purchase decisions.

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hermes handbags 2010/07/07 at 8:26 pm

You’re last point about not releasing the reins is so important. There’s a human tendancy that once we turn a function over to someone else–especially an “expert”–that we can forget about it and live happily ever after. If only that were true.

At a minimum, you have to be monitoring closely at the beginning to make sure the financial planner’s actions are matching your objectives. Everything can sound just fine and dandy when you’re meeting over lunch to discuss objectives, but that fact is never truly established until activity begins.

This isn’t a rap against financial planners, but rather a reminder that no one is or will be more responsible for your money than you will.

Reply

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