Investing in mutual funds is one of the most viable choices a newbie investor can make. However, it’s also not quite the same as investing in individual stocks or exchange-traded funds.
Investing in mutual funds has certain aspects that may not be easily understandable to newbie investors. So here is a roundup of the basic things you should know about investing in mutual funds.
Buying shares of a mutual fund is pretty straightforward. You can purchase shares directly from the fund or the authorized broker. Most of the time, you do that through an online platform. Keep in mind, however, that they are not freely traded on the market, unlike stocks of ETFs.
Before you buy the shares, make sure you understand the type of mutual fund you are investing in. Learn about the specific terms of the investment.
A lot of funds require a minimum contribution, which is usually between $1,000 and $10,000. However, not all mutual funds carry a minimum.
You can only buy mutual funds shares at the end of the trading day. Different from ETFs, the value of mutual fund shares doesn’t fluctuate throughout the day.
Rather, the fund calculates the net value of all the assets in the portfolio, and this is called the net asset value (NAV) every time the market closes.
The purchased shares of the order will be fulfilled according to the day’s NAV. And it won’t be fulfilled until the NAV has been calculated.
Fees and Charges
Another important thing to remember about mutual funds is their fee structure. These fee structures are basically commission charges.
Mutual funds carry annual expense ratios that are equal to a percentage of your investment. There are also a number of other fees that the fund may charge.
These fees do not go to the fund. Rather, they are the compensation of brokers that sell shares in the fund to the investors.
Not all funds carry upfront load fees. Rather than charging traditional load fees, some funds charge back-end load fees if you choose to redeem your shares before a specific number of years elapsed. Most mutual funds refer to this as the contingent deferred sales charge.
Mutual funds may also charge buying fees at the time of the purchase or redemption fees when you sell the shares back to the mutual fund.
Trading and Settlement Dates
When you trade mutual funds, you need to understand how and when the trades will be executed. The date on which you order to purchase or sell the shares is called the trade date.
On the other hand, the financial transaction is not finalized or settled until a specific number of days. The Securities and Exchange Commission requires mutual funds to settle the transactions within two days of the trade date.
Other important reminder when investing in mutual funds include ex-dividend and report dates. In a nutshell, if acquiring some dividend income isn’t really your goal for investing in the mutual fund, it’s better not to buy a mutual fund with dividends at all.