One item of advice repeated by experts across the board is to think long-term and avoid chasing performance. When buying mutual funds, balance is important. Chasing performance probably means getting there too late to catch the rise, and it may mean too much concentration. A balanced portfolio is best to make progress and avoid steep declines.
One can purchase through the companies that organize and manage the mutual funds. Examples are T. Rowe Price and Vanguard. Each offers a number of mutual funds. There are a large number of mutual funds, more than stock, there are about 10,000 mutual funds available on the major markets. An advantage of direct purchase is the trading account. These are convenient ways to purchase stocks, and many mutual fund companies permit their account holders to purchase elsewhere.
Buying through a Supermarket
A supermarket is a hosted marketplace that gathers many issuers and their mutual fund offerings into a single, one-stop shopping experience. Hosts include online brokers, mutual fund providers, and mutual funds. The pricing and fees bear attention. The host may offer lower pricing for its issues or those who pay for listings. One should examine the costs of every purchase. One must look for things to avoid at the supermarket.
Tips for Supermarket Shopping
The standard advice to healthy shopping at a grocery supermarket is to shop the outer ring, vegetables, meats, poultry fruits and fish. The inner aisles have the candy, popcorn and sugary temptations. In the world of mutual fund supermarkets, there are some distinct rules and cautionary advice that have helped investors avoid the mutual fund equivalent of the snacks aisle. Prices are important; fees and expenses, when applied to every transaction, add up to considerable amounts over time. One could have used these monies for investment, and paying it as fees represents a lost opportunity. Fees are part of the business, and the services provided through them are no doubt useful. The goal is to minimize fees and limit them to necessary things.
Many employer 401(k) plans offer mutual funds for employee investments. These funds can bring maximum benefits if one organizes them into a balanced portfolio that reflects the employee’s investment goals. One can add energy issues while limiting oil. One can add international markets and long-term bonds to take advantage of trends or to increase income. Customizing a portfolio is a great way to make progress; balancing a portfolio is an excellent way to avoid steep declines by spreading the risk across many sectors.
Buying through a Broker
A convenient way to buy mutual funds is through a broker and financial planner. The services they provide are probably quite valuable to people who do not wish to get involved in the selection and investment process, and would rather hire someone to do those tasks. However, their services have costs, and they include sales commissions and fees for financial planning services. These fees go with every transaction and can add up over time. One way to control costs when using a planner is to pay an hourly rate for specific tasks such as recommending some no-load mutual funds for investment.
There are advantages to holding assets inside of a retirement account or a 401(k). Tax liability occurs with distribution of assets by the mutual fund to the investors. Timing matters too, and one should avoid buying just before they pay dividends. One can have tax liability for a dividend without the advantage of growth. One can capitalize on growth by selling the shares for a profit. Capital gains taxes apply to brokerage accounts but not to retirement accounts. One can choose mutual funds that emphasize equity growth with a lesser emphasis on income. Some offer tax-managed funds that emphasize growth and minimize taxable income.