How to Buy Mutual Funds

How to Buy a Mutual Fund


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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