Good morning Dinks. Yesterday I had a client who asked “How do I buy mutual funds?” That’s a pretty general statement, the food equivalent would be “Where can I buy the best chocolate?” Well that depends on what type of chocolate you’re looking for, how much you’re willing to pay for good quality as well as your personal definition of good.
I love Cadbury Fruit and Nut chocolate bars, but that doesn’t mean their everyone’s favorite. It just means that I like them. The exact same thing is true when buying mutual funds. How to buy mutual funds depends on your own personal style, taste and goals.
What is your comfort level with risk?
This is the first question you should ask yourself when buying any type of new investment whether it be bonds, exchange traded funds, stocks or mutual funds. Why? Because it determines what type of fund you’ll want to buy and which sectors you should consider.
If you are a new investor a balanced mutual fund might be the best option for you because it’s an all-in-one solution. You get low risk income funds and high risk equity funds; it’s an all in one mutual fund without having to make individual investment selections.
If you’re investing for a short term goal and want stability over growth then an income fund might be best for you. These are all decisions that will be made based on your comfort level with risk. Ask yourself, how long do you want to invest and how comfortable are you with fluctuations in the value of your investment for a potential rate of return?
How much are you willing to pay?
This is the second question to ask when buying mutual funds. Different types of funds have different levels of fees. Sector funds such as gold or precious metals have higher fees (known as the Management Expense Ratio or MER) because they require a higher level of expertise from the fund manager as well as higher engagement with active trading.
Geographically focused mutual funds also tend to have higher fees because the company has to pay for the fund manager to live and work abroad. This is common with Asian and European funds.
If you’re not concerned with having actively managed funds then don’t pay for it. You can purchase Index funds which require very little effort on the fund manager’s part because the investments follow an existing stock index.
I like to have 1-2 index funds in each of my investment portfolios because it lowers the overall cost. The fees for index funds are usually less than 1% whereas other types of mutual funds can go as high as 3%.
Where do you want to buy them?
Now you know which type of mutual funds you want to buy and how much you’re willing to pay you can decide where you want to buy them. I like to purchase my funds through my bank because I can see my investment account balances when I log in to see my checking and savings accounts.
If you want someone to buy the mutual funds for you and make trades on your behalf you may want to purchase your funds with a full service broker, but keep in mind this service comes with a fee.