Mutual Funds vs. ETFs
Once you’ve decided to buy mutual funds rather than individual stocks or bonds, there’s another key question you need to ask before you buy a mutual fund: should you buy a comparable ETF instead? I personally prefer to invest in ETFs but each investor is different, with different needs and different goals. For help deciding between mutual funds and ETFs, read Understanding Exchange Traded Funds.
The two most important factors to consider before you buy a mutual fund are fees and returns. Only one statistic among the dozens of figures that mutual fund companies publish annually will tell you what you need to know about a fund’s fees and performance: total return after taxes and expenses. This statistic shows the return that fund-holders have made on their investment after all taxes and expenses are taken into account. When researching a fund’s total return after taxes and expenses, be sure to:
Avoid “hot” mutual funds
Consider the mutual fund’s total return after taxes and expenses over the past 5–10 years, not just the past year or so. And remember that past performance is no guarantee of future results.
Look for low expense ratios
Never buy an index fund with an expense ratio above 0.50% or an actively managed fund with an expense ratio above 1.50%.
Load Funds vs. No-Load Funds
Loads are fees that mutual funds charge investors in addition to standard mutual fund fees, such as expense ratios. Load funds charge these fees, whereas no-load funds don’t. Though you might think that load funds could get away with charging additional fees only if they outperformed no-load funds, studies have shown that most load funds both underperform no-load funds and cost more in fees along the way. With thousands of inexpensive no-load funds available, there’s just no good reason to buy load funds.
Where You Can Buy Mutual Funds
You can buy mutual funds directly from the mutual fund company or better yet, set up an investment account at one of the brokerage houses listed below. By setting up an account at an online brokerage, you aren’t limited to the types of investments you can purchase.
- Scottrade – you can thousands of different mutual funds.
- optionsXpress – one of the easiest online brokerages to set up. No paper forms or signatures required.
- TradeKing – offers regular trades and broker assisted trades for only $4.95.
- tradeMonster – offers mobile trading.
- optionshouse – this is basically the least expensive online brokerage for investors.
- Zecco – has commission free trades available.