Purchasing Mutual Funds

When you are ready to invest in a mutual fund, you can
either work through a broker or, in many cases, you can buy
directly from the mutual fund company. Many funds offer a
toll-free number for placing orders, and you can buy shares
of their funds.

Unlike stocks, you don’t have to specify the number of shares
you want to buy. You tell the fund company or broker that
you want to invest a
stated amount, and the fund or broker
tells you how many shares you will get.

Unlike stocks, mutual
funds sell partial or fractional shares.
A mutual fund company can’t sell you shares of a fund unless
you have first received the prospectus for that fund. Whether
you call or request the prospectus on the Web, you have to
give your name and address. Fund managers need this data
to prove that they have fulfilled their obligation to supply
you with a
prospectus.

When you begin to look into mutual funds, pay close attention
to those that come in families — preferably big families.
The term family refers to companies that offer several
different kinds of funds. How big is big? Think in terms of
ten or more funds. You can spot these families easily by looking
at the mutual fund reports in the business section of your
daily paper.

You typically see some kind of headline in the
columns followed by a list of funds offered by a particular
firm. It’s easy to spot the big families at a glance; these include
Fidelity, Oppenheimer, T. Rowe Price, and Vanguard.
Families of funds that charge commissions (also called loads
or load charges) provide the opportunity to switch among
their funds without paying additional commissions. You can
save considerable money with this option over the long term.
Make sure to check out this possibility.

A mutual fund has professional management, which comes
at a price. You, the investor, pay for this management, either
through commissions you pay when you buy or when you
sell and other fees that you are billed for periodically. These
fees reduce your return on investment and can run as high
as 7 to 8% a year, but 2% or lower is more common.
No-load funds don’t charge sales loads. No-load funds are
available in every major fund category.

Although not all mutual fund companies charge commission,
you need to know that the term “
load” is often used in two
ways. One is to specify commission charged when you buy
a fund (referred to as front-end load), and the other refers to
commission charged when you sell your shares in a fund
(known as back-end load).

Many investors wonder why they should pay a commission
to buy shares of a mutual fund when they can buy a similar
fund without a commission. The answer is that, in most
cases, there’s no good reason to buy a load fund rather than
a no-load fund. Several studies have indicated that the performance
of the two types of funds doesn’t differ. Unless you
come across that rare case in which the performance of a load
fund is so superior that it compensates for the load, save your
money and buy no-load funds.

Almost all mutual funds charge some kind of annual fee.
Analysts tally all these up into one measure called the expense
ratio, expressed as a
percentage of the invested funds. Expense
ratios range from about 0.75% to 2%, but a few charge as
much as 7%. The fund’s prospectus discloses the current
schedule of fees.

Beware of any load fund with a high expense ratio. Avoid
funds that charge a back-end load. These high fees and loads
are a large drain on an investment’s overall return; few funds
deliver performance consistently high enough to offset high
expenses.