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Once upon a time, back in the analog age, investors could only buy and sell mutual funds through financial professionals: brokers, money managers, and financial planners. But online investment platforms have made traders of us all, and today, anyone with a computer, a tablet, or even a smartphone can buy mutual funds. All you have to do is know where to buy them, what kind of fund you want, and what sort of fees, sales charges, and expenses you might encounter.
Of course, if you have a retirement-oriented account, such as a 401(k) plan or a self-directed IRA, the account custodian or plan administrator likely allows for direct mutual fund trading through its website (though with 401(k)s, you are restricted to those specifically offered by the plan and usually to a prescribed number of trades you can make per year or quarter). For the purposes of this article, we'll assume you're looking to buy on your own, either for a regular taxable account or a tax-deferred one.
Where to Buy Mutual Funds Online
Though a myriad of different investment websites-cum-trading platforms exists, there are three basic ways to purchase mutual funds online.
Investment companies
One often-overlooked option is to buy mutual funds directly through the investment companies that offer and manage them. Mutual fund companies range from publicly traded giants like T. Rowe Price to private boutique firms like American Century or Dodge & Cox. Each firm offers at least a few different funds, from passive index funds to actively managed equity funds to high-yield bond funds, designed to appeal to different investors and different investment goals.
One key advantage of buying directly from mutual fund companies: no sales commissions or brokerage fees. More of your investment dollar goes into the fund and right to work for you. The key downside: your investment options are limited to that company's family of funds.
Investment-cum-financial services companies
If you do not want to be limited to one fund family, some investment companies allow you to use an in-house account to buy and sell mutual funds and exchange-traded funds (EFTs) offered by other firms. The Vanguard Group and Fidelity Investments are two of the best-known of this breed of mutual fund managers that have morphed into full-fledged financial services firms, augmenting their own funds with competitors' products. The catch: these firms naturally want to push their proprietary funds, so you may incur additional transaction fees or pay commissions if you go "outside the family."
Brokerages
Yet another option is to open an online account at a brokerage. It will likely be the most expensive course. Typically, these types of accounts charge a transaction fee/commission for each trade, and they may also charge other account setup or maintenance fees. However, they will provide the biggest universe of mutual funds to choose from.
It is fairly simple to find an account with relatively low fees, especially if you comb the ranks of discount brokerages. Among the hottest (and cheapest) are exclusively online companies, such as E*TRADE and Betterment. With little overhead and largely automated services, their operating costs are considerably reduced, and it shows in their charges to consumers.
But don't count the brick-and-mortar brokerages out. Noting the e-brokers' success, especially with 30-something investors, many old-timers like TD Ameritrade, Charles Schwab, and Merrill Lynch (via its Merrill Edge) have launched digital platforms of their own. Often fees and account minimums are waived or discounted for clients who maintain online-only accounts, eschewing paper statements, and human advisory services. (Of course, having a human to talk to can be an appealing feature of a full-service broker.)
Setting Up an Online Mutual Fund Account
Once you decide on the financial institution and trading platform for your account, you need to set up that account—which you can do, naturally, online. Most firms make it pretty easy—just log on to the company’s site and click a link that’s usually labeled "Open an Account," "Let's Get Started," or something similar. You'll answer the same questions needed to open any brokerage account: personal info and type of account (individual or joint, IRA or taxable, etc.).
You may also need to indicate whether you want any fund dividends deposited into your account or automatically reinvested back into the fund. And you will have to furnish bank account information, to transfer the cash for your initial investment—and, if you so designate, to be used as the source for buying additional mutual fund shares each month. Many companies reduce the mandated sum to open an account if you set up one of these automatic investment programs.
Applying online usually takes 10 to 20 minutes. Processing the application and getting your account funded usually takes one to three days.
Executing an Online Mutual Fund Trade
Once your account is active, buying and selling mutual funds is simple. While each site is a little different, they all operate in essentially the same way. Indicate the ticker symbol of the fund you want to buy and the amount you want to invest—unlike stocks, mutual funds require you to invest a set dollar amount rather than purchasing a certain number of shares. In addition, you may be asked how you want dividend distributions handled (if you didn't set this up when applying): either by using them to buy additional shares of the fund, or having them deposited into your investment account as cash.
Once you fill out the trade request, your trade remains pending until the fund's daily share value is calculated at the end of the trading day. Most mutual funds report their net asset value (NAV) by 6 p.m. ET. Once the NAV is reported, you know how many shares you have actually purchased.
It takes between one and three business days for your trade to settle, meaning the official financial transaction is not completed right away. The SEC requires it to be no longer than two business days. Investment firms and brokerage sites post information about the time frame for mutual fund trades.
Choosing a Mutual Fund Online
Once you've mastered the mechanics, the real work begins: deciding what kind of mutual fund best suits your investment needs. First, consider your risk tolerance. Typically, investments that offer the potential for big gains, such as high-yield mutual funds and most stock investments, also come with a greater amount of risk than investments that offer more modest returns. If you have a low-risk tolerance, avoid mutual funds that invest in highly volatile securities or employ aggressive investment strategies that seek to beat the market. Because mutual funds are typically designed to be diversified investment vehicles, they also often carry lower levels of risk than individual stock investments.
Next, determine what you are trying to accomplish with this investment. If you want something that generates consistent income each year, choose a mutual fund that pays dividends or a bond fund. If you want to minimize the short-term tax impact of your investment, choose a fund that makes very few annual distributions, does not pay dividends, and focuses on long-term growth. If your chief goal is to create wealth quickly, even if it means increased risk, look at high-yield bonds or equity funds.
If you choose an actively managed fund, as opposed to a passively managed indexed fund, research the track record of your chosen fund's manager. The success of actively managed funds depends on the experience, skill, and instinct of the fund's manager, so the historical returns generated by other funds under their care are a good indication of their prowess. Know also that most actively managed funds carry higher fees than their passively managed counterparts.
Mutual fund expense ratios
In reviewing mutual funds, you should be aware of the types of fees and expenses you are likely to incur. In some cases, the costs associated with a given mutual fund may render its returns considerably less impressive.
The one cost carried by all mutual funds is called an expense ratio. This is simply a percentage of the value of your investment, generally between 0.1% and 3%, the mutual fund charges each year to defray its administrative and operating costs. As mentioned, actively managed funds typically have higher expense ratios than their passively managed counterparts because their increased trading activity generates more paperwork and requires more man-hours.
If the fund you choose has a particularly high expense ratio, make sure there is not a cheaper fund offered elsewhere with the same objectives and a similar portfolio. For indexed funds, especially, seek out the cheapest. Since they are designed to simply invest in all the securities of a given index, there is little difference between funds that are tracking the same index.
Mutual fund sales charges
In addition to the annual expense charge, many mutual funds impose sales charges, known as loads. Set by the fund management, a load is essentially a fee paid to the broker, financial planner, or investment advisor who sold you the fund (this is distinct from the sales commission or transaction fee the brokerage itself might charge you—confusing, we know). Load fees can be charged at the time of investment (a front-end load) or at redemption (a back-end load or deferred sales charge). Some funds are advertised as no-load funds. However, be aware they can still charge a number of other fees that make them just as expensive.
Carefully read the terms of your chosen fund to see if it charges any redemption, purchase, or exchange fees to shareholders who wish to alter their initial investment by selling shares, buying additional shares, or moving to another fund offered by the same firm. Many funds do, particularly if you make a change within 60 or 90 days of your initial purchase.
Other common expenses include 12b-1 fees, to defray the cost of marketing, advertising, and distributing the fund and its literature.
Many funds offer three classes of shares, such as A, B, and C, that carry different types of expenses to cater to different investment strategies. For example, Class A shares typically carry a front-end load fee but have lower expense ratios and 12b-1 fees than B and C shares, making them better suited for someone who wants to make a single investment and hold it for a long period.
What Are Common Ways to Buy a Mutual Fund Online?
The most common ways to buy a mutual fund online are directly from a fund provider, through an investment company, or through an online brokerage.
How Do You Purchase a Mutual Fund?
Once you have an account through an online brokerage or investment firm and that account is funded, you'll need to initiate an order and input key information such as the dollar amount of the investment and the ticker of the mutual fund. Mutual fund purchases are executed once per day after the market closes and it typically takes one to two additional days for the transaction to close.
What Should You Keep in Mind When Buying a Mutual Fund Online?
There are a huge number of mutual funds available to investors. Not every online account and service will provide access to all of these funds, however. Before you initiate a purchase, be sure to consider the purpose of your investment and your goals. Assess your risk tolerance as compared with the level of risk inherent to the fund. Be sure to know what the fees and other costs may be, including if there are viable alternative funds that may be cheaper.
The Bottom Line
Trading mutual funds online is a relatively recent option for investors. But in choosing a firm to invest with, the criteria are pretty traditional: How reputable is this company? What sort of services, amenities, and products do they provide? How easy are they, and their trading platform, to deal with? And when it comes to picking a mutual fund, the basic questions to ask—how its purpose fits your investment goals, the level of risk it poses vis-à-vis your tolerance, and the size of its fees—remain eternal.