Beginning investors may find purchasing shares of mutual funds a bit intimidating when first starting out, but our guide is here to help you along the way. You are going to find that there are many different asset groups among the large amounts of available funds, with each having their own strategies when it comes to investing.
Below is a guide that will help new investors in the basic fundamentals when it comes to trading with mutual funds.
What exactly are mutual funds?
Mutual fund is where a company that handles investments will gather the funds from different investors and turn it into one huge amount of many different assets, such as stocks, commodities, bonds, real estate, and others. Then investors put their money into buying shares of this mutual fund.
Some of the major types of mutual funds are stock funds, bond funds, index funds, balanced funds, and many others.
The process of trading mutual funds is different than with stocks. While investments in mutual funds require between $1,000 and $5,000, for stocks, the minimum is at least a share. Also, stocks can be traded at any time throughout the day, but mutual funds − only after the trading day comes to an end. It is because of the Net Asset Value (NAV), which is calculated at the end of each day, and which determines the cost of mutual fund shares.
Charges and fees on mutual funds
Investors need to know the types of charges and fees that come with purchasing and redeeming mutual fund shares.
There are several mutual funds that have load fees when purchasing or redeeming shares of a fund. Similar to when you are purchasing or trading stocks, there is a commission that has to be paid. The load fee is for the time and the expertise of selecting a fund. They can range anywhere between 4% and 8% of the amount being invested into a fund.
If an investor purchases shares prior to investing into a fund, there is also a front-end load fee charge.
The back-end load, or the charge for a deferred sale, occurs when shares of a fund are being sold within a certain time period of time after they have been purchased. This fee is also generally the highest within the first year from the time of purchase. For instance, if a fund is charging 6% on shares that are redeemed within the first year, it will then be reduced by 1% for each of the following years.
Each year there will be a deduction for the level-load fees, which comes out of the assets of a fund to cover marketing and distribution costs, known as the 12b-1 fees. The level-load fees have a fixed percentage, based on the average of the fund’s net assets and are capped by law at 1%.
Need more advice? Don’t hesitate to check out our complete guide to investing into stocks and bonds and learn how to anticipate market movements and navigate the trading field.