Mutual Fund Buyer's Guide
- Generally, you can buy into a mutual fund using one of two routes. Most brokerages offer access to mutual fund investing. You can usually buy mutual fund shares online, if you have account access set up, or over the telephone with a live broker. Some mutual fund companies allow investors to purchase shares in one of their funds directly from them. When you purchase directly from a fund company, you do not pay commission charges. Through a brokerage, you will pay commission unless the brokerage includes the fund you want on its no-transaction fee list.
- Most mutual funds require an initial minimum investment to their fund. Initial minimums typically range from just $25 or $50 to tens or even hundreds of thousands of dollars. You're most likely to see minimum requirements of between $1,000 and $5,000. Some fund companies waive or reduce initial minimums if you agree to an automatic investment plan. This involves electronically transferring funds from your checking or savings account to the fund on a regular basis.
- You have a massive universe of mutual funds to choose from. Some funds invest exclusively in one type of investment such as stocks or bonds. Many invest in a mix of products. In all cases, mutual funds state their approach in a prospectus that they must offer up for review before taking your money. Some mutual funds, known as index funds, look to replicate the returns produced by market indices, such as the S&P 500. Others focus on stocks of large companies, particular sectors of the economy, a certain part of the world or another broad or narrow niche.
- When you sell a mutual fund, you incur either a capital gain or loss. If it's a gain you must report it to the IRS and pay applicable taxes. Consider how long you intend to hold a fund prior to buying it, as this ultimately has tax ramifications. When a mutual fund turns over its investments, it can produce capital gains. If investments it holds pay dividends, the fund returns a portion of them to its shareholders. When you receive a capital gain or dividend distribution from a fund you own, you owe the IRS taxes on those distributions. You can skirt this annual tax hit by holding mutual funds inside a tax-deferred account such as an IRA.
- All mutual funds charge an expense ratio that covers overhead. Most expense ratios hover around 1 percent. Some funds charge additional fees to cover expenses ranging from general operations to marketing to broker's fees. Funds can charge sales loads, which cannot exceed 8.5 percent, as of January 2011, when you purchase shares or when you sell them. When you sell shares, some funds levy a redemption fee, which federal regulations cap at 2 percent.
