How to Open a Mutual Fund Account

As we have discussed before it is best to open a mutual fund account directly through the fund itself. Granted, this method will create more paperwork than if you opened it through an online brokerage account. However, if you are concerned about fees eating away at any profits you make at mutual fund investments then going directly through the mutual fund is best.

Why is that? Well, in order to buy a mutual fund through an online brokerage account you have a pay a trade fee, and there this fee is often higher than a typical equity trade. In addition to this fact if you desire to dollar cost average, it is extremely expensive to try to do that through your online brokerage account.

When you open a mutual fund account directly through that mutual fund you will pay no load (see Rule #1) fee and you will only have the normal expense ratio as a cost and sometimes a custodial fee.

Step 1:
Determine what type of mutual fund best complements your investment portfolio. e.g. if you currently have a mid-cap and large cap mutual fund in your portfolio, for diversification sake you should look into a small cap mutual fund or international fund in order to spread your investments into divergent areas of the stock market.

Step 2:
Search investment websites to determine what are the good mutual funds available. Run mutual fund screens using long-term performance as the main filter because excellent long-term results are a better measurement to use than short-term returns.

Step 3:
Examine the risk of the portfolio. If might be too high or too low for your liking. You do not want a mutual fund that is going to keep you up at night and you do not want one that will frustrate you because it does not take risks.

Step 4:
Look over all the information provided and get an idea if this mutual fund is something you are interested.

Step 5:
Make the decision to invest. Find out how much the minimum initial investment is and subsequent investments. Call up the mutual fund directly (or get their prospectus application online) and ask for all the necessary paperwork to invest to be mailed to you. Also, while you have them on the phone ask any questions about the process or the mutual fund. They want you to invest so they are willing to take the time out to help you.

Step 6:
Read the prospectus and fill out the application and write a check to the mutual fund. Also, sign up for an automatic debit to be taken out each month for an amount you can afford. This is dollar-cost-averaging which will help you guard against price swings in the market.

Mutual Fund Rules

Rule #1: Never buy a front-load or back-loaded mutual fund
There are literally thousands of mutual funds available to investors and a large majority of them are no-load mutual funds. Load funds are usually pushed by brokers in order to pad their pocketbook, their company’s bottom line and the mutual fund. Also, look if there are redemption fees because those can be killers.
Rule #2: Never look at only short-term performance
Long-term performance is the best way to predict the ability of a mutual fund to perform well in the future (although there is no guarantee). A strong investment team with years of experience running a fund a is your best bet.

Rule #3: Read the prospectus
Yes, they are boring, but they will provide you with important information regarding the mutual fund. Remember, if you want to pick your own investments and save yourself money you must know what you are getting into.

Rule #4: Examine the expense ratio
Is the expense ratio comparable to other funds in its category? Determine how much of an expense ratio you think is fair and that you are willing to pay.

Rule #5: Examine the turnover rate
If your mutual fund has a high turnover rate then come tax time this turnover can sometimes take a big chuck from your profits

Written by Nagel on December 21st, 2006 with 4 comments.
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