Mutual funds are one of the most popular investments, offering many benefits to investors. But buying and selling mutual funds can be confusing, especially for new investors. There are thousands of funds to choose from, different fees to consider, and mutual funds trade differently than other popular securities like stocks and exchange-traded funds (ETFs).
Here’s what you need to know about how to trade mutual funds.
How to buy mutual fund shares
Mutual funds do not trade like stocks and ETFs, they can be bought and sold at any time during the trading day. Mutual funds can be bought and sold at the fund’s net asset value (NAV) after the market closes. Mutual fund shares are purchased directly from the fund, unlike shares purchased from another market participant.
Mutual funds can be purchased through an online broker or directly through the fund management company. Most mutual funds require an investment of a few thousand dollars, but many stocks and ETFs can be purchased for the price of one share, or even less if your broker offers fractional share trading.
Some mutual funds may be closed to new investors if they grow to the point where managing the money becomes difficult, or if the portfolio manager thinks it’s difficult to find attractive investments for a larger fund.
Choosing the best mutual fund for you
Choosing the right mutual fund can be daunting. There are thousands of different currencies to choose from and different categories to filter through. Depending on your investment goals, you’ll want to think about the type of fund you want.
When you find a fund that interests you, be sure to read the fund’s prospectus, which can be found on the fund’s website or through your broker. Pay special attention to your fees, as they can ultimately eat into your income as an investor.
Stock funds are great for long-term goals like saving for retirement or college, while bond or money market funds are better for short-term goals like saving for a down payment on a house or buying a car.
Index funds are one of the most popular investments due to their low costs and various advantages. Index funds hold stocks or bonds that are included in market indexes such as the S&P 500 or the Russell 2000. The fund is managed by an underlying index, so there is no expensive portfolio manager or team of analysts making investment decisions. Index funds have outperformed most actively managed funds over time.
When to buy and sell mutual funds
A mutual fund trades only once a day, after the market closes at the fund’s NAV. So, you don’t trade in mutual funds the way you might with stocks or ETFs. Remember that if you place a trade after the market closes, you will receive the next day’s closing NAV as your price.
In fact, most mutual funds are not designed to trade vehicles, but rather are meant to be held as long-term investments. Some funds, such as money market mutual funds, can be held for the short term, but if you’re buying stock mutual funds, you’ll want to focus on holding for the long term. There may be fees associated with buying and selling mutual funds and you may pay more if you hold the funds for a short period of time.
Mutual fund fees
While they may seem small, fees can add up over time and they come directly out of your return on investment. Here are some of the main fees to be aware of when investing in mutual funds
- Management fee: The management fee is paid to the fund managers and investment advisors.
- 12b-1 fees: These bad fees cover the costs of buying and selling the currency.
- Other Expenses: Other miscellaneous expenses are in this category like legal, accounting and other administrative expenses.
- Installations: Some funds charge loads or commissions, which are paid to brokers when the funds are bought or sold. Front-end loads are paid when buying funds, back-end loads are paid during the sale of funds. Back-end loading may decline each time you hold shares of the Fund. Funds that do not charge these commissions are known as no-load funds.
Most of these fees are factored into the fund’s expense ratio. Index funds typically come with expense ratios of less than 0.10 percent, while actively managed funds can cost 1 percent or more.
Investors can save money by searching carefully on their broker’s platform or through other investment research services. By choosing a no-load fund, you won’t have to give up anything in performance, but you’ll gain less by not paying the fees.
Trade and settlement days
The trading day is known as the day you place your order to buy or sell a stock, but the trade is not considered final until it is settled a few days later.
The Securities and Exchange Commission requires mutual fund transactions to be completed within two business days of the trade date. If you trade on Monday, your trade will be closed until Wednesday, but Friday trading days don’t have to close until Tuesday because trades don’t settle over the weekend.
Selling mutual fund shares
Mutual fund shares are sold the same way you bought them: directly through the fund company or through your broker. You will receive the next available net asset value as your value for each share sold. You will also have to pay any applicable fees or charges.
If the fund charges back-end freight, charge this as part of the sale. Depending on how long you hold the money, the fee may be reduced or waived entirely.
Early redemption rules
Because mutual funds are intended to be held as long-term investments, out-of-the-money transactions result in additional costs and complexity for the fund manager and other shareholders. As a result, many funds charge early redemptions.
These fees are paid if you buy and sell shares within 30 days and amount to 2% of the sale price. Unlike the sales load, which goes to the broker who sells the funds, the redemption fee goes directly to the fund. If you withdraw early, a fund may block you from trading the stock for a period of time.
Mutual funds are very easy to trade if you know what sets them apart from other investments like stocks and ETFs. Since mutual funds are intended to be long-term investments, it is not necessary to be present for trading every second of the trading day. Be sure to understand the various fees associated with mutual funds, especially when selling, which can eat into your investment returns.
Editorial Disclaimer: All investors are advised to conduct their own independent investment strategies before making any investment decision. Investors are also advised that past investment product performance is not a guarantee of future price performance.