Mutual funds are making a big comeback. After helpng generations of investors meet their retirement goals, fickle investors have jumped ship to low-cost ETFs and indices. Mutual funds are wooing them back with lower and no fee mutual fund investing. Should you invest?
Here’s why mutual funds still deserve a place in your investment portfolio.
Why Should You Invest in Mutual Funds?
Mutual funds are investment funds run by professional money managers. They pool the assets of investors and invest them in a portfolio of stocks, indices, bonds, commodities and/or other securities. These managed portfolios provide many advantages over buying and selling individual investments.
- Choice of active, passive and hybrid investment funds
- Diversification across a portfolio of investments
- Lower trading fees than investing in individual securities
- A variety of investment styles, themes and smart factors to choose from
- Potential for outperformance of stock indices
- Top rated investment managers with performance track records
- Human investment advisory advice may be offered
Mutual Funds vs ETFs
Mutual funds represent 75 percent of the $20 trillion in US open end investment fund assets. The other 25 percent of assets are ETFs, which were not on the scene 15 years ago. ETFs are a popular low cost investment vehicle. Although mutual funds cost more than ETFs, as fees plummet the cost gap with ETFs is narrowing. If you want to trade low cost investments like stock indices, then ETFs are a better choice. With an ETF, you can trade in and out of your holdings using intraday pricing whenever you want.
A mutual fund, on the other hand, has high redemption fees (e.g., $50 for Fidelity if the fund is sold within 60 days of purchase) and one daily price quote. But keep in mind, low fee ETFs will not provide a cost advantage if you rack up high trading fees. If you are saving for retirement or college, regular contributions to a mutual fund without having to pay trading fees may provide the best value. This cost advantage has made mutual funds the most popular investment product in 401k plans.
- Managed by a professional money manager
- Broad choice of active and passive funds
- No trading fees to make automatic contributions or reinvest dividends
- Large and growing choice of passive index mutual funds
- Trading fees, management expenses and sales charges may apply
- Portfolio managers not the investor in charge of investment decisions
- Fees and penalties may be charged to withdrawal funds early
- Fund’s holdings only disclosed monthly or quarterly
- Net asset value is revealed once at the end of the day
- When market conditions change, the fund cannot easily be traded
- Low fees and expenses
- Wide choice of passive funds
- Can trade long or short like a stock
- Tracks but cannot outperform an index
- Can incur high trading fees
- Trading fees incurred to buy more units or balance the fund
Mutual Fund Passive Index Trackers
The story of mutual funds does not end with the arrival of passive ETFs. Instead, a new chapter has begun – the mutual fund index tracker. While actively managed mutual funds have seen a steady decline in assets over the decade, asset flows into mutual fund index trackers is growing at a more robust rate.
The value of the fund closely tracks the index value. Since they do not have high trading or management costs, they are typically low cost funds. Like any index fund, these funds track indices across investment style, regions, sectors and various themes. By eliminating active management and fees, they are levelling the cost advantage with ETFs.
How to Invest in Mutual Funds Online in 2019:
Fidelity – Best Option for US Investors
- What is Fidelity?
- Choose a mutual fund on Fidelity
- Buy a Mutual Fund on Fidelity
- Why Buy Mutual Funds on Fidelity
Mutual Fund Fees: 0.00 pa
Min Deposit: $0
Fidelity has radically transformed its fund business from a supplier of premium fund products and services to one of the lowest cost providers of mutual funds and ETFs. The recent elimination of trading fees and minimum account standards has completed its transformation into a low fee fund broker. Human investment advisory services have long been a pillar of this leading investment advisor and broker. They include retirement planning, wealth management, and financial planning. Investment products include mutual funds, ETFs, stocks, options, bonds, and commodities. Buy mutual funds and ETFs quickly through mobile trading or use the advanced trading platform to access real-time pricing, margin trading, short selling and options. Fidelity offers over 10,000 mutual funds across dozens of fund families.
Whether you want to invest in large cap value, small cap growth, a women’s fund or leveraged company stocks, you will find a complete universe of investment types at Fidelity. Start your search with the Mutual Fund Evaluator.
Select Research > Mutual Funds
Choose the Asset Class, Category and Fund Family. Risk is also an option.
Morningstar Rating, Returns and Expenses are additional search criteria.
Click, See Results
A list of funds together with performance data, ratings and expense ratios will display. Click on funds of interest for a more in-depth profile. Be sure to note the symbol of the funds you want to buy.
Select Accounts & Trade > Trade
Click Trade Mutual Funds
Click Buy a Mutual Fund
Enter the mutual fund symbol and dollar amount
Click Preview Order
- No fees, no account minimums
- Over 10,000 mutual funds to choose from
- Extensive mutual fund research and evaluator tool
- Full service investment advisory services
DEGIRO – Best Option for Non-US Investors
- What is DEGIRO?
- Choose a mutual fund on DEGIRO
- Buy a Mutual Fund on DEGIRO
- Why Buy Mutual Funds on DEGIRO
Mutual Fund Fees: 2.00 pa
Min Deposit: $0
DEGIRO is the fastest growing online broker in Europe. DEGIRO gives investors the tools to be active investors. For $2 a trade, investors gain access to institutional-grade trading on over 50 global exchanges. Investors can build their own portfolios with access to stocks, bonds, and commodities, and invest in mutual funds and ETFs. This is a no frills service with no research or investment advisory services. No fee is charged to invest in money market funds through FundShare Cash Funds. A wide universe of listed investment funds is accessed through Euronext Fund Services for a fee of € 7.50 + 0.10% plus a 0.20% service fee.
Mutual funds can be bought through Euronext Fund Services. Start your search with the Morningstar Fund Screener.
Select your criteria from the screener, shown in the image. In addition to categories, costs and ratings, search by returns and turnover.
Or use a predefined Morningstar Screen.
Click Set Criteria > Show Results
A list of funds will display. Click on funds of interest for a more in-depth profile.
Choose the type of product you want to trade > Funds
Enter the fund symbol
Enter the order amount
Enter the share or dollar amount
Click Place Order
- Low fee trading
- Large universe of investment funds
- Access to global exchanges
- Top mobile app
Who Should Invest in Mutual Funds?
Millennial investor – This young investor wants to save for retirement. He has a longer time horizon and higher risk appetite. Since he does not need the income for many years, he can invest in actively managed mutual funds to seek higher returns. He may choose actively managed mutual funds, high growth stocks, and alternative investments like hedge funds and REITS. Up to 10-20 percent of his portfolio may be placed in these securities.
Mid-career investor – By mid-life, saving for retirement is an important goal. This investor is seeking not only long-term income appreciation but also investments that will create an income stream in retirement. They include mutual funds invested in dividend paying stocks and interest paying bonds. A large investment advisory firm like Vanguard or Fidelity can also provide related retirement products such as annuities.
Retirement saver – Mutual funds are a good investment choice when saving for a long-term financial goal. As retirement approaches, the portfolio becomes more conservative. A target-date mutual fund gradually increases the bond allocation and decreases stocks as retirement nears.
What are Mutual Fund Fees?
With many different types of mutual fund fees, it easy for the investor to get gouged on fees. Before shopping for mutual funds, take a minute to familiarize yourself with these fees.
Expense ratio – The expense ratio encompasses the management and operating expenses of a fund. Actively managed, international and small cap funds, for example, have higher expense ratios because they are more expensive to manage. An international artificial intelligence fund will require more research and trading fees to create than a large cap US automotive fund.
Sales charges – Commonly referred to as load and no load funds, this fee is the commission you pay to buy funds. A Front-end load fee is charged at the time of the purchase of the fund. A Back-end load fund is charged when the mutual fund is sold.
No load funds are typically sold by the fund issuer. Fidelity, for example, does not charge a commission on its own mutual funds but loads are charged for funds of other fund families.
Redemption fees – Many mutual funds charge high fees to sell a fund, especially if the sale is within a short time period after the purchase, say 60 days or under a year. This fee typically declines over time.
Minimum account balances vary across providers. To invest in funds, Vanguard has a minimum account balance of $1,000. Fidelity has waived its minimum to trade mutual funds. You can buy mutual funds on an automatic investment plan for a set amount a month or quarter. Brokers may provide access to mutual funds with low or no minimum account requirements.
Low cost index funds and ETFs have pushed the price of investment funds down 40 percent over the last decade. In 2018, the average asset-weighted expense ratio was 0.15 percent for passive funds and 0.67 percent for active funds (Source: Morningstar).
An all out price war among funds has broken out, and investors are the winner. ETFs have the lowest expense fees. But index mutual funds are fighting back. Fidelity has introduced ZERO expense ratio index funds and Vanguard has lowered fees and the minimum investment (to $3,000) to access its lowest cost funds.
Low and no fee online brokers are lowering the cost of buying investment funds. Following are the cheapest fund managers in 2018 (Source: Morningstar Direct Data).
Morningstar provides investor friendly mutual fund screening tools, enabling investors to compare expense ratios and performance across thousands of mutual funds. Most mutual fund suppliers will provide low or no fees on their own funds. Fidelity has recently waived fees on Fidelity funds. Most non-Fidelity funds have a fee of $49.95.
Mutual funds are not deposit accounts so they are not covered under deposit safety insurance like your bank account. Your assets are held by a third party custodian. The funds assets are regularity audited by an independent third party auditor. Mutual funds are insured as investment accounts, for example under the SIPC in the US.
Auto Investing is not new to robo-advisors. Investors who invest money on a regular schedule (e.g., the same amount and day each month) earn higher returns than those who try to time the market.