Putting money into mutual funds isn’t hard, but it’s not the same as putting money into stocks or exchange-traded funds (ETFs). Because mutual funds are set up uniquely, some things may not be obvious to a first-time investor. Because of wrongdoing in the past, many mutual funds limit certain fine types of trading.
Knowing the basics of trading in mutual funds can make the process go more smoothly and get the most out of your investment.
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Mutual Fund Investing: Buying Shares
Mutual funds can’t be bought and sold on the open market as stocks and ETFs can. Still, it’s easy to buy them straight from the financial company that runs the fund. You can also buy them online or through a full-service or discount broker.
Many funds have a minimum amount you have to give, usually between $1,000 and $10,000. Some have higher minimums, and some don’t have any at all.
You may also find that some mutual funds are no longer accepting new investors. The more popular funds get so much money from investors that they become hard to manage, so the company that runs them decides to stop taking on new investors.
Getting information
Do your research to find the fund or funds you want to invest in before you make a decision. There are thousands of them, so you have many options.
These include “conservative” funds that only invest in blue-chip stocks and “aggressive” and “speculative” funds that take big risks in hopes of big gains. Some funds only invest in certain industries or parts of the world.
There are also many other options besides stocks. Don’t forget about bond funds, which promise low risk and steady interest payments.
Remember that most funds don’t put all their money in one place. Some of the money could be set aside for investments that balance the portfolio.
Best Places to Find Out
You should go to the website of the company that runs the fund as your first stop. Companies like Vanguard and Fidelity give a lot of information about each fund they manage. This includes a description of the fund’s goals and strategy, a chart showing its quarterly returns to date, a list of its top stock holdings, and a pie chart showing its overall composition. There will also be a list of all costs and fees.
You can get more information about the fund and its competitors from analysts and commentators on financial news websites. If you use an online broker, their website will have more information, such as risk ratings and analyst recommendations.
If it is an index fund, look at how well it has been tracked in the past. How often does it meet, beat, or fall short of the standard it tries to beat?
As with any investment, you should know what you’re getting into before you invest.
When to buy and when to sell?
Mutual fund shares can only be bought at the end of the business day.
Mutual fund share prices don’t change daily as exchange-traded securities do. Instead, the fund figures out the net asset value (NAV), the total value of the assets in its portfolio, after the market closes each business day at 4 p.m. Eastern Time.
1 Usually, mutual funds post their most recent NAVs by 6 p.m.
If you want to buy shares, your order will be filled after the NAV for the day is figured out. Or if you want to invest $1,000, for example, you can place your order any time after the end of the previous day, but you won’t know how much you’ll invest until the day’s NAV is posted and then pay per share. If the NAV for the day is $50, your $1,000 will get you 20 shares.
Investors can usually buy fractional shares of a mutual fund. In the above example, if the NAV is $51, your $1,000 can buy 19.6 shares.
The Fees
Mutual funds have annual expense ratios equal a certain percentage of your investment. There may also be other fees.
Some mutual funds have commission fees called “load fees.” These fees don’t go to the fund. Instead, they pay brokers who sell investors shares in the fund.
Not all mutual funds, though, have fees paid upfront. Some funds charge “back-end load fees” instead of traditional “load fees” if you sell your shares before a certain number of years have passed. In some cases, this is called a contingent deferred sales charge (CDSC).
Mutual funds may also charge fees when you buy shares or sell them back to the fund. These fees help pay for the costs that the fund has to pay.
Most funds also charge fees called 12b-1, which are used to market and advertise the fund.
A, B, and C shares, which are the different types of shares offered by many funds, have different fees and expenses.
Trade and Settlement Dates
The trade date is the date you put in your order to buy or sell shares. But the deal isn’t finished or settled until a couple of days have passed.
The Securities and Exchange Commission (SEC) says that mutual fund transactions must be settled within two business days of the trade date.
If you place an order to buy shares on Friday, the fund must settle your order by Tuesday since trades cannot be settled over the weekend.
Ex-Dividend Dates and Dates to Report
Find out when shareholders are eligible for dividend payments if you invest in a mutual fund that pays dividends but want to limit your tax liability. Your taxable income for the year goes up if you get dividend distributions, so if getting dividend income is not your main goal, don’t buy shares in a fund that is about to give out dividends.
The ex-dividend date is the last day new shareholders can be eligible for an upcoming dividend. Due to the settlement period, the ex-dividend date is usually three days before the report date. When the fund looks at its list of shareholders who will get the distribution.
If you want to get a dividend payment, you need to buy shares before the ex-dividend date so that your name will be on the list of shareholders on the record date.
On the other hand, if you want to avoid paying more taxes because of dividends, you should wait to buy until after the record date.
Selling Shares in a Mutual Fund
Like when you buy them, you can sell shares of a mutual fund directly through the fund company or an authorized broker.
You’ll get an amount equal to the number of shares you sold times the current NAV, less any fees or charges you owe.
A CDSC sales charge may apply depending on how long you have owned your investment. If you want to sell your shares soon after buying them, you may have to pay extra fees. This is called “early redemption.”
How to cash in early
Mutual funds are made to be long-term investments, while stocks and ETFs can be used as short-term investments.
If shares of a mutual fund were traded all the time. It would not be good for the people who still own shares. Mutual funds don’t keep much cash on hand, so when you sell your shares, the fund often has to sell assets to pay for the sale.
When a fund sells an asset for a profit, it gives all its shareholders a capital gains distribution. This raises the amount of money they have to pay taxes on for the year and lowers the value of the fund’s portfolio.
Frequent trading also drives up a fund’s administrative and operational costs, raising its expense ratio.
Not surprisingly, fund companies discourage frequent trading.
Mutual funds keep a close eye on shareholders who try to “time the market” or “round-trip trade” to make money from short-term changes in a fund’s NAV. This is to discourage excessive trading and protect the interests of long-term investors.
Some mutual funds penalize investors for selling their shares too soon, and others temporarily suspend trading privileges for investors who do so frequently.
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