A Step-By-Step Guide To Mutual Fund Investing On Ameritrade

Investing in mutual funds is a great way to build wealth over time and achieve financial goals, such as buying a house or retiring comfortably. Mutual funds are a diverse basket of stocks, bonds, or other securities, making it easy to build a diverse investment portfolio. They are also relatively cheap and simple to invest in, thanks to the many trading apps and online brokerages available today. TD Ameritrade is one such brokerage firm that offers mutual fund investments. In this article, we will discuss the steps to investing in mutual funds through TD Ameritrade, including choosing the right funds, opening an account, and making trades. We will also cover the benefits and risks of investing in mutual funds and provide an overview of the different types of mutual funds available.

Choosing a standard brokerage account

A brokerage account is an arrangement between you and a licensed brokerage firm. Once your account is set up, you can deposit funds and place investment orders through the brokerage account, and the transactions will be carried out on your behalf. You are free to invest in whatever you choose – stocks, bonds, mutual funds, and more – as you own all the assets in your brokerage account.

There are two types of brokerage accounts: a margin account and a cash account. A margin account allows you to borrow against your eligible securities, which can be helpful when you need to buy more securities, take advantage of timely market opportunities, or give yourself a source of overdraft protection. However, it's important to note that margin borrowing is not suitable for everyone, and you should consider all the risks and limitations before selecting this option. On the other hand, a cash account only allows you to use the cash that you deposited to buy stocks, bonds, mutual funds, or other investments. This type of account presents less market risk as you are only investing the assets that you already have, but it can be limiting when timely opportunities or emergencies arise.

When choosing a standard brokerage account, there are a few things to keep in mind. First, consider the fees associated with the account. Some accounts may charge a transaction fee or commission for each trade, as well as account setup or maintenance fees. It is important to review the terms and conditions carefully to understand all the costs involved. Additionally, look for a brokerage account that offers a wide range of investment options, including mutual funds. This will provide you with flexibility and the opportunity to diversify your investments.

Another important factor to consider is the level of support and services provided by the brokerage firm. Some firms offer 24/7 support and convenient branch locations, while others provide online tools and resources to help you screen and evaluate investments and develop a plan. It is also essential to ensure that the brokerage firm you choose is reputable and has a good track record. You may want to read reviews or seek recommendations from trusted sources before making your decision.

Finally, consider the ease of use and convenience of the brokerage account. Look for a platform that is user-friendly and intuitive, with a smooth account setup process. Also, check if the brokerage account can be easily managed through a mobile app or online portal, allowing you to access your investments and make trades from anywhere.

Understanding fees and charges

When investing in mutual funds, it is important to understand the associated fees and charges, as these can impact your overall returns. Mutual funds typically charge a variety of fees, and it is essential to be aware of these costs before investing. Here are some common fees and charges to look out for:

• Expense ratio: This is the most common fee associated with mutual funds. It represents the percentage of your investment that goes towards covering the fund's operating costs rather than generating returns. The expense ratio is usually higher for funds with active management compared to passive management.
• Sales load: This is a sales commission paid to brokers for selling you shares of the fund. There are "front-end sales loads" charged when you purchase shares, and "back-end sales loads" or "deferred sales charges" charged when you sell your shares. To avoid these fees, look for "no-load mutual funds."
• 12b-1 fees: These fees are deducted from the fund's assets to cover marketing and distribution expenses.
• Redemption fees: This fee is charged when you sell or redeem your mutual fund shares.
• Exchange fees: This fee is incurred when you exchange shares of one mutual fund for another within the same group.
• Purchase fees: A fee charged when purchasing shares of a mutual fund.

It is important to carefully review the prospectus of a mutual fund, which outlines the fees and charges associated with the investment. Additionally, when investing through a brokerage platform like TD Ameritrade, there may be additional fees, such as transaction fees or account setup and maintenance fees. These fees can vary depending on the platform and the type of account you choose.

It is worth noting that some mutual funds, known as "no-load funds," may not charge sales loads but may have other fees that make them equally expensive. It is crucial to read the fine print and understand all the associated costs before investing.

Additionally, remember that fees can significantly impact your long-term returns due to compounding. Even small percentage increases in fees can lead to substantial differences in returns over time. Therefore, it is essential to consider fees and charges when selecting a mutual fund and to prioritize low-fee funds whenever possible.

Selecting the right mix of stocks and bonds

When selecting the right mix of stocks and bonds, it's important to consider your investment goals, time frame, and risk tolerance. Each asset class—stocks, bonds, and cash—plays a different role in a balanced portfolio.

Stocks are generally riskier than bonds, and bonds are riskier than cash. A portfolio with 90% stocks and 10% bonds will expose you to more risk but also potentially give you a higher return than a portfolio with 60% stocks and 40% bonds.

If you're investing for retirement, you might have a different mix than if you're saving for a down payment on a house. The amount of time you have to invest before needing the money will also impact your target asset mix. For example, if you want a $10,000 down payment in 6 years, you would need to save around $114 a month for 6 years, assuming a 6% average annual return. But if you want the same down payment in only 3 years, you would need to save over $250 a month.

Your risk tolerance is also important. Are you comfortable with the unknown? Stocks are generally riskier than bonds, so if you have a low-risk tolerance, you might want to allocate a larger percentage of your portfolio to bonds.

It's also important to understand how each asset class behaves in different market conditions. Stocks generally provide a return when the company does well, but you may lose money if the company doesn't perform as expected. Bonds provide regular interest payments, and cash or short-term investments have minimal risk of losing value but also a lower potential return.

By combining these three asset classes in a way that aligns with your goals, time frame, and risk tolerance, you can create a balanced portfolio that helps you achieve your investment objectives.

Researching mutual fund companies

Before investing in a mutual fund, it is important to carefully consider the fund's investing objectives, risks, charges, and expenses. Mutual funds are part of a large collection of diverse fund families, groups of funds run by individual companies.

There are several options for purchasing mutual funds. One option is to buy them directly from the investment companies that offer and manage them. These mutual fund companies can range from publicly traded giants to private boutique firms. Each firm offers a variety of different funds, designed to appeal to different investors and different investment goals. The key advantage of buying directly from mutual fund companies is that there are no sales commissions or brokerage fees, meaning more of your investment dollar goes into the fund. However, the downside is that your investment options are limited to that company's family of funds.

Another option is to go through investment-cum-financial services companies, such as Vanguard Group and Fidelity Investments. These companies allow you to use an in-house account to buy and sell mutual funds and exchange-traded funds (ETFs) offered by other firms. However, they will naturally want to push their proprietary funds, so you may incur additional transaction fees or pay commissions if you choose a competitor's product.

A third option is to open an online account at a brokerage, which will likely be the most expensive course. These accounts typically charge a transaction fee/commission for each trade and may also charge other account setup or maintenance fees. However, they provide the biggest universe of mutual funds to choose from.

When choosing a mutual fund, it is important to consider your risk tolerance and investment goals. If you have a low-risk tolerance, avoid funds that invest in highly volatile securities or employ aggressive investment strategies. Also, be sure to research the fees and expenses associated with the fund, as these can significantly impact your returns.

Opening an investing account

• Decide on the type of account: Choose between a standard brokerage account, a retirement account (such as a 401(k) or IRA), or another type of account that suits your specific goals.
• Select a brokerage firm: You can open a brokerage account through an investment company or bank. Compare different firms and consider factors such as fees, investment options, and customer service.
• Complete the application process: Visit the website of your chosen brokerage firm and look for a link to open an account. Provide the required personal information, such as your Social Security number and date of birth. You may also be asked about your investing experience and employment.
• Fund your account: After your application is approved, you will need to transfer funds to your new account. This can typically be done by linking a bank account and making an initial investment.
• Choose your mutual funds: Research and select the mutual funds you want to invest in. Consider factors such as investment objectives, risks, charges, and expenses. Diversification is important, so consider choosing funds that span different asset classes and investment styles.
• Place your order: Once you have decided on the mutual funds you want to invest in, you can place your order through your brokerage account. Specify the amount you want to invest and the ticker symbol of the fund.
• Review and monitor your investments: After purchasing mutual fund shares, remember to regularly review and monitor your investments to ensure they align with your investment strategy and goals.

Remember to consider your financial goals, risk tolerance, and the fees associated with different investment options when opening an investing account and purchasing mutual funds.

Frequently asked questions