Saturday, November 29, 2008
Knowing Where to Buy Mutual Funds
Investors use a wide range of channels to purchase mutual funds, but buying directly from the fund is the most popular, Buying directly from a fund company is the cheapest and most convenient way to buy for most investors. Just telephone the company of your choice and ask for an application. Complete the application form and send in your initial investment in the form of a check, and you’re an investor —it’s that simple.
(If you participate in a 401(k) plan or other employer-sponsored investment program, you may have the opportunity to buy shares from a fund company indirectly, through your company’s investment plan. The paperwork and procedures are quite similar.) Only a couple of the questions on the typical mutual fund application are likely to cause you any confusion. Expect to state how you want any capital gains and dividends handled. You can have these profits paid to you in cash, or have them automatically reinvested in your account, buying more mutual fund shares. I recommend that you reinvest profits from capital gains and dividends so that your investment portfolio can benefit from the power of compounding. The mutual fund application may also ask whether you want to participate in an automatic monthly investment plan. This kind of plan automatically transfers a specified amount of money each month from your checking account into the mutual fund of your choice.
If you’re starting out with an investment program, I strongly recommend that you choose this option. After a few months, you won’t even notice the money “missing” from your budget, but you can look forward to the satisfaction —excitement even — of the steady growth of your investment portfolio, as reflected in your monthly or quarterly statements. Not all investors choose to buy mutual fund shares directly from fund companies. Some prefer to invest through full service brokers, financial planners, or their bank or credit union. Investing in this way has one significant advantage and one major disadvantage. The advantage is the availability of investment advice and guidance. A good broker, planner, or banker should be willing to spend time analyzing your personal financial situation and be capable of offering unbiased, thoughtful suggestions concerning the best investment options for you. He or she should also have printed materials to share with you giving information about funds, investment strategies, economic forecasts, and other useful data. If you want this kind of help, consider consulting one of these financial professionals. The disadvantage is the cost associated with this professional help. Full-service brokers, financial planners, and banks generally sell load funds rather than no-load funds. Load funds charge sales fees, often significant ones, whenever you buy shares. These fees can have a real impact on your investment profits. Show that the investment performance of load funds is no better than that of no-load funds.
Therefore, the sales fees you pay buy the services of your broker, planner, or banker, but not an improvement in investment profits. It’s up to you to decide whether the professional’s advice is worth the expense.
If you invest through a broker, planner, or bank, you may also have to deal with the confusing phenomenon of share classes.
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