Similar to bonds and stock trading, mutual funds trading is easy to conduct online as well. The process is quite simple if you’ve done your research, know how much capital you want to invest, what type of funds you want to invest in, the fees and charges attached to them, and where to buy them from.
Ways of buying mutual funds online and where to buy from
If you’re looking to invest in mutual funds online, there are three ways you can do this by, and a whole host of website that claim they will help you do it.
If you possess a retirement account like a 401(k) or an IRA that offers self-management capabilities, you can probably trade in mutual funds through your financial institution’s website if it is a retirement planning facility they offer. If you wish to accumulate your savings via a tax-deferring account or want to opt for a fund that distributes regular taxable profits but are not in need of the income at the moment, you can discuss this with the administrator of your retirement plan to work out a solution that suits your requirements.
If retirement planning is not on the agenda for purchasing mutual funds, the most apparent option is for you to purchase the funds directly from firms that offer them. A number of recognized and established firms with proven track-records exist in the US and other countries that offer a variety of mutual funds to meet the needs of all investors. It is advisable to only consider firms that are transparent in their business operations and have an established track-record to avoid possible investment scandals.
If that isn’t an option you prefer either and you find it too binding to have to stick with products and services of one particular firm, you may consider firms offering mutual funds that let you trade in products of other firms using an in-house account. You may be charged additional transaction fees by your funds provider for making use of such a service. Another option available to you are online brokerage websites like E-TRADE, TD Ameritrade, or Scottrade. These brokerage firms will normally charge transaction fees as well for each trade you conduct, along with other account maintenance fees, but finding a mutual fund that imposes low fees and charges is fairly straightforward.
Selecting a fund
After deciding on how you will go about making the investment, you must consider various options and determine what type of mutual fund will best serve your needs. To do so, you must first determine the level of risk and uncertainty you are comfortable with. Potentially high-yielding funds come with a higher risk index than those that return modest yields. If you find yourself to be less tolerant to investment risk, you might want to omit funds that put investments in unstable securities or adopt an aggressive strategy when making investments.
You also need to assess your goals and objectives for making this investment. If you are looking to get regular income from your investment, you may want to consider a funds that provides dividends. If, on the other hand, you are looking to reduce the tax impact on your earnings and are not in need of regular cash, it will be ideal for you to consider funds that do not pay dividends, and disburse few distributions annually, focusing rather on long-term development. If you are open to high risks and want to make big money quickly, you can consider high-yield funds and bonds. All mutual funds will provide prospective investors with written material detailing the fund’s goals, strategies, and its assets.
A fund is only as profitable as the person managing it, so assessing the fund manager and their track-record is also important. It becomes even more important if you are considering to invest in an actively managed fund, as its profitability depends entirely on its manager’s experience and skill-level.
Charges and expense ratio
When you’ve decided on how you’re going to make the investment, and what kind of fund you’ll be investing in, you’re half way there but aren’t quite done considering your options yet. Investing in any mutual fund will incur certain charges and expense fees. Some funds charge higher fees than others while offering the same level of profitability while costs associated with others will considerably reduce your expected returns so you will have to carefully consider your options.
Although the fees you are charged will vary between funds, with some funds imposing certain fees that others don’t, one cost that all funds incur is the expense ratio. This is a percentage of your total investment that you are charged by the fund to cover maintenance and operational costs. Generally, this percentage could be anywhere between 0.1% to 3%. Actively managed funds require more paperwork and time, sometimes incurring additional staff wages, so their expense ratio is generally higher than those of funds that are passively managed.
The higher the expense ratio of a fund, the lower your income is consequently going to be, so if your preferred fund has a higher ratio, assess if there are other funds with similar goals and portfolio that are offering a lower expense rate. Comparing and contrasting different funds of similar scope becomes vital at this stage. If you are investing in indexed funds, it is advisable to opt for the cheapest one available.
Fees and classes of shares
Although there are many funds that will only impose a couple of charges including an expense charge, there are a number of others that also levy various other load fees, which can be considered as a commission paid directly to the funds broker, and other advertising and promotion charges. If a fund imposes load fees, they will either be deducted as a sales charge at the time you make the investment or at the time of redemption as a delayed sales charge. A lot of funds today claim they do not charge load-fees and while some of them can be very transparent in their operations and hence profitable, there are a number of others that will levy a variety of other fees and charges making them as expensive as funds that charge load fees.
To meet varying investment needs, most funds offer Classes A, B, and C of shares, each with their unique fee and expense plan. Class A shares, for example, usually levy a front-end load fee with a low expense ratios and lower 12b-1 advertisement fees than shares B and C, which makes them an ideal choice for investors who wish to invest once and hold the investment for a long period of time. Investors should select the share class that compliments their investment strategy.
Trading in mutual funds
After all the required information has been forwarded to your preferred trading platform and your account has been created, trading in mutual funds is fairly straightforward. While every website will differ in terms of its layout and additional services, they all operate on the same model. Select which fund you want to buy, and enter the amount of money you wish to invest. Other details like what you would like to do with the earned dividends, whether reinvesting them automatically or having them deposited into a specified bank account, may also be required.
When the trade request has been completed and submitted, the request will remain pending until the end of the business day when the value of the share is determined. Most mutual funds will communicate their net asset value around 6 p.m. EST, which will determine the number of shares that you have purchased.
However, your transaction isn’t completed straight away and it may take anywhere between 1-3 business days before your trade ‘settles’. You will be kept updated as to the status of your trade, but the SEC requires all trades to be settled within three working days.