Mutual Fund Investment: Where To Begin?

Investing in mutual funds is a popular way to build a diversified portfolio of stocks, bonds, or short-term investments. There are several ways to invest in mutual funds, including through a brokerage account, directly from the fund provider, or via an online platform. When deciding where to invest, it is important to consider factors such as fees, fund choices, and research tools. It is also crucial to understand the different types of mutual funds, their associated risks, and how to evaluate them to make an informed decision.

Investment companies

One of the key advantages of buying directly from mutual fund companies is that there are no sales commissions or brokerage fees. This means that more of your investment dollar goes directly into the fund. However, the downside is that your investment options are limited to that company's family of funds.

If you want to avoid being 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 (ETFs) offered by other firms. Vanguard and Fidelity Investments are two well-known examples of this type of company. However, they may charge additional transaction fees or commissions if you choose funds from outside their proprietary offerings.

Another option is to open an online brokerage account, which typically offers a broader selection of mutual funds to choose from. These accounts usually charge a transaction fee/commission for each trade and may also have account setup or maintenance fees. Discount brokerages, such as exclusively online companies like E*TRADE and Betterment, tend to have lower fees due to reduced operating costs.

When choosing an investment company, it is important to consider factors such as affordability, fund choices, research and educational tools, and the ease of use of their website or app.

Investment-cum-financial services companies

The Vanguard Group and Fidelity Investments are two well-known examples of this type of company. They have expanded their offerings beyond their own funds to include competitors' products. However, these companies naturally promote their own funds, so you may have to pay additional transaction fees or commissions if you choose a fund from outside their family of funds.

Another option is to open an online account with a brokerage firm. This will likely be the most expensive option, as these accounts typically charge a transaction fee or commission for each trade and may also charge account setup or maintenance fees. However, they provide the widest range of mutual funds to choose from.

You can find accounts with relatively low fees, especially among discount brokerages. Exclusively online companies, such as E*TRADE and Betterment, tend to have lower operating costs due to their automated services and minimal overhead.

Some traditional brokerages, like Charles Schwab and Merrill Lynch, have also launched digital platforms with discounted or waived fees for clients who maintain online-only accounts. These online-only accounts do not receive paper statements or human advisory services.

Online brokerages

It is simple to find an account with relatively low fees, especially if you look at the ranks of discount brokerages. The hottest (and cheapest) are often exclusively online companies, such as E*TRADE and Betterment. With little overhead and largely automated services, their operating costs are considerably reduced, and this is reflected in their charges to consumers.

However, don't count out the traditional brick-and-mortar brokerages. Noting the success of e-brokers, many old-timers like Charles Schwab and Merrill Lynch have launched their own digital platforms. Often fees and account minimums are waived or discounted for clients who maintain online-only accounts, avoiding paper statements and human advisory services.

When choosing an online brokerage, you'll want to consider:

• Affordability: Be mindful of mutual fund investor fees, which can come from brokerage accounts (transaction fees) and the funds themselves (expense ratios and front- and back-end "sales loads").
• Fund choices: Workplace retirement plans may carry only a dozen or so mutual funds. You may want more variety. Some brokers offer hundreds, even thousands, of no-transaction-fee funds to choose from, as well as other fund types like ETFs.
• Research and educational tools: With more choice comes the need for more research and thinking. It's vital to pick a broker that helps you learn more about a fund before investing your money.
• Ease of use: A brokerage's website or app is only helpful if you can understand and feel comfortable with the experience.

To set up an online brokerage account, you'll need to log on to the company's site and click a link to open an account. You'll answer questions about your personal information and the 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.

Once your account is active, buying and selling mutual funds is simple. Indicate the ticker symbol of the fund you want to buy and the amount you want to invest. Mutual funds require you to invest a set dollar amount rather than purchasing a certain number of shares.

It takes between one and three business days for your trade to settle, and the SEC requires it to be no longer than two business days.

Employer-sponsored retirement plans

One example is a 401(k) plan, a type of defined contribution plan. In this type of plan, you or your employer (or both) contribute to your individual account, sometimes at a set rate, such as 5% of your annual salary. The employee shoulders the investment risks, and the value of the account will fluctuate due to changes in the value of the investments. Upon retirement, you receive the balance in your account, which depends on contributions plus or minus investment gains or losses.

Another example is a Roth 401(k) plan, where you contribute money on an "after-tax" basis. This means that cash flows from your check into the plan after tax deductions. The benefit here is that qualified withdrawals later on are tax-free. This is a useful tool if you end up in a lower tax bracket upon retirement.

A third example is a Health Savings Account (HSA), which is paired with a high-deductible health plan. An HSA is a type of savings account for qualified medical expenses. Contributions are "pre-tax", interest grows tax-free, and withdrawals made to cover qualified medical costs are also tax-free. Money in your HSA also rolls over from year to year, unlike with a Flexible Spending Account (FSA).

Employers benefit from offering these plans by receiving tax breaks and other incentives, as well as being able to attract and retain valuable employees.

Direct from fund provider

One option for investing in a mutual fund is to buy directly from the mutual fund company. This route has the advantage of avoiding sales commissions or brokerage fees, meaning more of your investment goes directly into the fund. However, it also limits your investment options to that company's family of funds.

Some investment companies allow you to use an in-house account to buy and sell mutual funds and exchange-traded funds (ETFs) offered by other firms. Examples include Vanguard and Fidelity Investments. However, 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".

Another option is to buy mutual fund units through the stock exchange, just like a company stock. This can be done through the NSE – MFSS and BSE – StAR MF.

Before investing in a mutual fund, you must first complete the "Know Your Customer" (KYC) process, which establishes your identity and address through relevant supporting documents.

You can also invest online through the websites of the respective mutual funds.

Frequently asked questions