How to Buy Mutual Funds Online

1. How to Buy Mutual Funds Online

2. Once upon a time, 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 turned us all into traders, and today anyone with a computer, tablet, or even a smartphone can buy mutual funds. All you have to do is know where to buy them, what type of fund you want, and what types of fees, sales charges, and expenses you may encounter.

3. Of course, if you have a retirement-oriented account, such as a 401 (k) plan or self-directed IRA, the account custodian or plan administrator will likely allow direct trading of mutual funds through their website. (Although with 401 (k) s, you are restricted to those specifically offered by the plan and generally to a prescribed number of operations that you can perform per year or quarter.) For the purposes of this article, we'll assume you're looking to shop on your own, whether it's for a regular taxable account or a tax-deferred one.

4. Where to buy mutual funds online • Although there are a myriad of different investment websites and trading platforms, there are three basic ways to buy mutual funds online.

5. Investment Companies • The most obvious 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. Every company offers at least a few different funds, from passive index funds to actively managed stock funds and high-yield bond funds, designed to appeal to different investors and different investment objectives. • A key advantage of buying directly from mutual fund nav companies: no sales commissions or brokerage fees. A larger portion of your investment dollar goes to the fund and works for you. The key downside: Your investment options are limited to that company's fund family.

6. Financial and investment services companies • If you don't want to limit yourself to one fund family, some investment companies allow you to use an internal account to buy and sell tax saving mutual funds and exchange-traded funds (ETFs) offered by other firms. Vanguard Group and Fidelity Investments are two of the best-known mutual fund managers of this class that have morphed into full-fledged financial services firms, augmenting their own funds with competing products. The catch: These businesses naturally want to boost their own funds, so you may incur additional transaction fees or pay commissions if you get out of the family.

7. Brokerage • Yet another option is to open an account online at a brokerage. This is probably the most expensive course - these types of accounts typically charge a transaction / commission fee for each trade, and they may charge other account setup or maintenance fees as well. However, they will provide the largest universe of mutual funds to choose from. • Finding an account with relatively low fees is fairly straightforward, especially when you compare the ranks of discount brokerage agencies. Among the most popular (and cheapest) are online-only companies like E * TRADE and Betterment. With little overhead and largely automated services, your operating costs are dramatically reduced, and it shows in your charges to consumers. • But don't discount brick-and-mortar brokerages. Noting the success of e-brokers, especially with investors in their 30s, many veterans like TD Ameritrade, Charles Schwab, and Merrill Lynch (through Merrill Edge) have launched their own digital platforms. And, often, account minimums and fees are waived or discounted for customers who maintain accounts online, avoiding paper statements and human advisory services. (Of course, having a human being to talk to can be an attractive feature of a full-service broker.)

8. Set up a mutual fund account online • Once you decide on the financial institution and trading platform for your account, you need to set up that account, which you can naturally do online. Most companies make it easy enough: just log into the company site and click on a link that is usually called "Open an account", "Let's get started" or something similar. It will answer the same questions necessary to open any brokerage account: personal information, type of account (individual or joint, IRA or taxable, etc.). • You may also need to indicate whether you want dividends from the fund to be deposited into your account or automatically reinvested into the fund. And you will need to provide bank account information to transfer the cash for your initial investment and, if designated, to be used as a source to purchase additional mutual fund shares each month. Many companies reduce the amount required to open an account if you set up one of these automatic investment programs. • The online application typically takes 10-20 minutes. Processing the application and obtaining funds for your account generally takes one to three days.

9. Setting Up a mutual fund transaction online • Once your account is active, buying and selling mutual funds is simple. While each site is a bit different, they all operate essentially the same way. Enter 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 certain dollar amount rather than buy a certain number of stocks. Additionally, you may be asked how you want dividend distributions to be handled (if you did not set this up when applying): by using them to purchase additional shares in the fund or by depositing them into your investment account as cash. • Once you complete the trade request, your trade remains pending until the daily share value of the fund is calculated at the end of the trading day. Most mutual funds report their Net Asset Value (NAV) at 6 p.m. ET. Once the NAV is reported, you will know how many shares you have actually purchased.

10. Choosing a mutual fund online • Once you've mastered the mechanics, the real work begins: deciding which type of mutual fund is best suited to your investment needs. First, consider your tolerance for risk. Generally, investments that offer the potential for large returns, such as high-yield mutual funds and most equity investments, also carry 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. • Next, determine what you are trying to achieve with this investment. If you want something that generates consistent income each year, choose a dividend-paying mutual fund or bond fund. If you want to minimize the short-term tax impact of your investment, choose a fund that makes very few annual distributions, pays no dividends, and focuses on long-term growth. If your main goal is to build wealth quickly, even if that means higher risk, look for high-yielding stocks or bond funds. • If you choose an actively managed fund, rather than a passively managed index fund, research the track record of the manager of your chosen fund. The success of actively managed funds depends on the fund manager's experience, skill and instinct, so the historical returns generated by other funds in his care are a good indication of his prowess.

11. The bottom line • Trading mutual funds online is a relatively recent option for investors. But when choosing a company to invest with, the criteria are quite traditional: What is the reputation of this company? What kinds of services, amenities and products do you offer? How easy is it to deal with them and your trading platform? And when it comes to choosing a mutual fund, the basic questions to ask yourself - how its purpose fits your investment objectives, the level of risk it poses to your tolerance, and the size of its fees - remain timeless.

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