Investing can be overwhelming for many new investors.
With so much money on the line, they’re worried that might make a mistake with even the most simple of investing tasks.
It’s like when you had to suture your first laceration in medical school. You were probably so nervous that you were going to screw it up and mess up that patient’s leg forever.
So we’re going to go really basic with this post, and discuss the process of how to buy a mutual fund.
Step 1: Picking a Mutual Fund
I am a big advocate for index funds, because these funds hold hundreds or thousands of stocks or bonds within a single investment. Because they are tracking an index that does not change often, it costs very little to manage an index fund, and those savings are passed on to you, the investor.
I think a diversified portfolio can be done with just three index funds. Here’s the list of mutual funds for a simple three-fund portfolio of U.S. stocks, international stocks, and U.S. bonds at Vanguard, Fidelity, and Schwab:
|Total U.S. Stock Market||VTSAX||FSKAX||SWTSX|
|International Stock Market||VBTLX||FTIHX||SWAGX|
|U.S. Bond Market||VTIAX||FXNAX||SWISX|
In general, when selecting your index fund, you should stick with the mutual fund company where you invest your money (i.e. invest in Vanguard funds in a Vanguard investment account and invest in Fidelity funds in a Fidelity investment account).
For example, if you try to invest in a Vanguard index fund from a Fidelity investment account, Fidelity will charge a $75 transaction fee, while it is free (not even a trading commission is charged) to invest in Fidelity mutual funds at Fidelity.
Step 2: Make sure that the mutual fund is the right investment and not an ETF
Sometimes a mutual fund is not the right way to invest in an index fund. Exchange-traded funds (ETF for short) are alternatives to mutual funds. They are essentially stock versions of mutual funds. These ETFs can be traded on the exchange just like any other stock. It’s slightly more complicated (but still really easy) to buy ETFs.
Here are the three major scenarios when you would prefer an ETF over a mutual fund in index investing:
1. You don’t have enough money to invest in the Premium share class
Fidelity (and Vanguard) have multiple share classes of the same mutual fund. For regular investors, the Fidelity share classes are the Investor Class and the Premium Class. The Premium Class has a $10,000 minimum investment, and has lower management fees (expense ratio) than the Investor Class. However, the ETF version of the mutual fund often has the same low expense ratio as the Premium class Mutual Fund. So if you don’t have enough money to invest in the Premium class of index fund, then you should invest in an ETF.
2. You are investing in a taxable account at a non-Vanguard brokerage
ETFs are more tax-efficient than mutual funds at Fidelity and Schwab (they are equivalent at Vanguard). Therefore, the after-tax return of ETFs are higher than that of mutual funds at Fidelity and Schwab. I invest in ETFs in my taxable accounts and mutual funds in my retirement accounts. Check out this article for more information on how to buy an ETF.
3. You prefer ETFs over mutual funds
Some people simply prefer ETFs over mutual funds. They like the concept of being able to trade an ETF intraday and can watch the price of their investment fluctuate during the trading day.
Unlike stocks, you don’t buy mutual funds in an open market. The upside of this is that you can buy or sell your mutual fund at any time of day. This is particularly convenient if you’re busy at work all day and don’t have time to make a trade on your phone or at a computer during the normal trading hours of 9:30 am – 4:00 pm (don’t the traders have it nice — only 6.5 hours of work!).
You don’t have to worry about market or limit orders, or the best time of day to trade. You’ll get the same price on your trade, whether you make the purchase at noon or at midnight.
Step 4: Enter trade information
Now let’s enter the trade information. I’ll go through how to buy a mutual fund with Fidelity, but the process at Vanguard, Schwab, or another broker will be similar.
First, enter the ticker symbol into the “Symbol” section. For this example, let’s buy the Fidelity® Total Market Index Fund – Premium Class (FSTVX). The screen will transform into a mutual fund page with many fewer options.
Now all you need to enter is the amount you want to buy.
One of the benefits of a mutual fund over an ETF is that you don’t need to calculate fractional shares. If you want to invest $15,000.00 (or $15,723.31), you can do that with mutual funds because they allow fractional shares. You have to purchase ETFs in whole share amounts, which means that you will need to calculate how many shares the amount of money you want to invest converts to.
Click Preview Order and then submit.
You’ll notice that there is no commission for purchasing a mutual fund.
The order does not “fill” instantaneously like a market order for a stock or ETF would, but you’ll get a message that the money will be invested at the “next available price.” The next available price is usually at the end of the current trading day during regular market hours, or the end of the next trading day if you trade outside market hours.
In any event, you can check your order at that time and confirm that your trade is completed and your money is invested in the mutual fund.
If you need any help with investing in a mutual fund at Fidelity, you can click on the “Help Me Trade” button at the top left corner of the trading window, or call customer service. Remember to have them help you enter the order online rather than have them place the order for you.
Investing your money isn’t complicated — and the major brokerages try to make it as simple as possible.
What do you think? Do you use primarily ETFs, mutual funds, or a mix of both in your investment accounts?
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