How to Buy Mutual Funds

If you want to know how to buy mutual funds, there are a few steps you should take before you start achieving your savings and investment goals. This guide will help you purchase your first fund and build a complete portfolio of funds that suit you and your goals.

Choosing Where to Buy Mutual Funds

Although you can buy mutual funds through a discount broker like Charles Schwab, the best way to purchase mutual funds is through a mutual fund company. But you don’t want to start with just any mutual fund company. Before investing, you’ll want to do some research to find a reputable company with a wide selection of low-cost, high-quality mutual funds.

Minimum Initial Purchase for Mutual Funds

Most mutual funds have what’s called a minimum initial purchase, which is the amount you need to save before buying shares of your first fund. Most mutual fund companies have minimum initial purchase requirements. For example, most Vanguard funds have a minimum initial purchase requirement of $3,000. Fidelity offers its funds with no minimum initial purchase requirement.

Opening an Account to Buy Mutual Funds

If you don’t already have an investment account with a brokerage firm or mutual fund company, you will need to open an account before you are ready to buy your first fund. Opening an account does not require money; all you have to do is choose the company you want to invest with and follow their account opening procedures.

Choosing the Right Type of Account for Investing

You will also need to determine what type of account suits your investment needs. Here are the basic types of accounts and how they work:

• Individual Brokerage Account: This is a standard brokerage account established for one individual. Contributions are not tax-deductible, and investors pay taxes on returns and profits. For more information on this topic, see this article on taxes related to mutual funds.
• Joint Brokerage Account: This works the same way as an individual brokerage account, except that there are two account holders, such as spouses.
• Individual Retirement Account (IRA): Eligible individuals can contribute to this type of account without paying taxes. Tax growth is deferred, meaning account holders do not pay taxes until they withdraw.
• Roth IRA: This is an individual retirement account funded with after-tax dollars, meaning contributions are not tax-deductible, as they are in a traditional retirement account. However, tax growth is deferred and qualified distributions (withdrawals) are tax-free. For more information about Roth and traditional IRAs, see this article on how individual retirement accounts work.

Best Types of Mutual Funds for Beginner Investors

Whether you’re just starting to invest or looking to build a portfolio from the ground up in the best way possible, there are a few standout mutual funds that can do the trick. Choosing the best mutual funds is more than just buying last year’s best performer.

Instead, investors should understand their investment goals, future plans, and be prepared for a long-term strategy. For example, if you are saving for retirement, your investment timeframe is likely more than ten years. This means you can take on more risk, essentially meaning you are likely to have more of your investment assets allocated to stock funds rather than bond funds.

Here are some of the best types of funds to start a long-term portfolio:

• Funds
  S&P 500 Index: Index funds can be a great place to start building a portfolio of mutual funds because most of them have very low expense ratios and can give you exposure to dozens or hundreds of stocks representing various industries in just one fund. As the name suggests, index funds simply hold the same securities as a specific index. S&P 500 index funds invest in about 500 of the largest U.S. companies. Index funds are managed passively, which means their primary goal is to mimic the ownership and performance of an index, and thus the operating costs of these funds are very low. Mutual fund companies like Vanguard, Fidelity, and T. Rowe Price are good places to find the best index funds. You may also consider Charles Schwab.
• Balanced Funds: Also known as mixed asset funds or asset allocation funds, these mutual funds invest in a balanced asset allocation of stocks, bonds, and cash. The allocation typically remains consistent and invests according to a particular investment objective or style. For example, the Fidelity Balanced Fund (FBALX) has an approximate asset allocation of 65% stocks and 35% bonds. It is considered a medium-risk fund or what industry experts might call a moderate portfolio. Vanguard also has a balanced index fund, Vanguard Balanced Index (VBIAX), which suits investors looking for moderate risk. Balanced funds can be ideal for beginner investors because they are well-diversified and can thus serve as standalone investments or as core holdings to start a larger portfolio.
• Target Date Funds: Target date funds invest in a mix of stocks, bonds, and cash appropriate for a person investing until a certain year, which is usually retirement. As the target year approaches, the fund manager will gradually reduce market risk by shifting the fund’s assets from stocks to bonds and cash, which is what individual investors do manually. Therefore, target date funds are a type of “set it and forget it” investment that does not require ongoing management. For example, if you are saving for retirement and think you might retire around 2035, the appropriate option for you might be the Vanguard Target Retirement 2035 Fund (VTTHX).

Conclusion

Buying mutual funds can be simple, but investors should be careful to choose the right investment company and the best funds that fit their individual goals. Once you choose your first mutual fund, you will have the foundation to start. You can then build on that foundation by purchasing more shares of that fund and adding more funds for greater diversification.

Disclaimer: The information on this site is for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information constitute a recommendation to buy or sell securities.

Source: https://www.thebalancemoney.com/best-steps-for-buying-mutual-funds-4102184