Like stocks and bonds, mutual funds are easy to trade online. All you have to do is know where to buy them, what kind of fund you want and how much you want to invest. There are also some fees and expenses you should be aware of before you make any mutual fund investments.

Where to Buy

There are three basic ways to purchase mutual funds online, and a myriad of different websites facilitate these transactions.

If you have a self-directed retirement account, such as an IRA or 401(k), the managing financial institution likely allows for mutual fund trading through its site to facilitate your retirement planning. If you are looking to build your savings through a tax-deferred account, or are interested in a mutual fund that makes frequent taxable distributions but do not currently need the investment income, check with your retirement plan administrator to see if you can trade through it directly.

If you are not looking to invest through a retirement account, the most obvious option is to buy mutual funds directly through the financial institutions that offer them. There are a number of well-respected investment firms in the United States and abroad that offer a wide range of mutual funds to suit any investment need. Each firm offers at least a few different funds, from passive index funds to high-risk, high-yield bond and equity funds, designed to appeal to different investors.

If you do not want to be tied to the products offered by one particular company, some mutual funds allow you to use an in-house account to buy and sell products offered by other firms, though you may incur additional transaction fees. Another option is to use an online brokerage account through a trusted site such as TD Ameritrade, E-TRADE or Charles Schwab. Typically, these types of accounts charge a transaction fee for each trade, and they may also charge other account setup or maintenance fees. However, it is fairly simple to find an account with relatively low fees.

Choosing a Fund

After you decide how you want to make your investment, you must decide what kind of mutual fund best suits your investment needs. First, consider your risk tolerance. Risk tolerance refers to your ability to handle the possibility that you might lose money on any given investment. Typically, investments that offer the potential for big gains, such as high-yield mutual funds and most stock investments, also come with a greater amount of risk than investments that offer more modest returns. If you have a low risk tolerance, avoid mutual funds that invest in highly volatile securities or employ aggressive investment strategies that seek to beat the market.

Next, determine what you are trying to accomplish with this investment. If you want something that generates consistent investment income each year, choose a mutual fund that pays dividends. If you want to minimize the short-term tax impact of your investment, choose a fund that makes very few annual distributions, does not pay dividends and focuses on long-term growth. If your chief goal is to create wealth quickly, even if it means increased risk, look at high-yield bond or equity funds. Each mutual fund is required to provide a prospectus that outlines the goals of the fund and the contents of its portfolio.

If you choose an actively managed fund, research the track record of your chosen fund's manager. The success of actively managed funds depends on the experience, skill, and instinct of the fund's manager, so the historical returns generated by other funds under his care are a good indication of his prowess. If you choose an indexed fund, which is passively managed, this is less of an issue.

Expense Ratio

Now that you have chosen a fund and website to invest through, you should be aware of the types of fees and expenses you are likely to incur. In some cases, the costs associated with a given mutual fund may render its returns considerably less impressive.

The one cost carried by all mutual funds is called an expense ratio. This is simply a percentage of the value of your investment, generally between 0.1 and 3%, the mutual fund charges each year to defray its administrative and operating costs. Actively managed funds typically have higher expense ratios than their passively managed counterparts because their increased trading activity generates more paperwork and requires more man-hours.

If the fund you choose has a particularly high ratio, make sure there is not a cheaper fund offered elsewhere with the same objectives and a similar portfolio. For indexed funds, especially, look for the cheapest fund available. Since indexed mutual funds are designed to simply invest in all the securities of a given index, there is little difference between funds that track the same index.

Fees and Share Classes

In addition to the annual expense charge, many funds impose a load fee. A load fee is essentially a commission charge paid to the broker who sold you the fund. Load fees can be charged at the time of investment, called a sales charge, or at redemption, called a deferred sales charge. Some funds are advertised as no-load funds. However, be aware they can still charge a number of other fees that make them just as expensive.

Carefully read the terms of your chosen fund to see if it charges any redemption, purchase or exchange fees to shareholders who wish to alter their initial investment by selling shares, buying additional shares or moving to another fund offered by the same firm. Other fees include 12b-1 fees, to defray the cost of marketing and advertising the fund and account fees.

Many funds offer three classes of shares, such as A, B, and C, that carry different types of expenses to cater to different investment strategies. For example, Class A shares typically carry a front-end load fee but have lower expense ratios and 12b-1 fees than B and C shares, making them better suited for someone who wants to make a single investment and hold it for a long period. Assess which share class provides the best value given your intended investment strategy.

Executing Your Trade

After you submit the necessary information and establish an account on your chosen trading platform, buying and selling mutual funds is simple. While each site is a little different, they all operate in essentially the same way. Indicate the ticker symbol of the fund you want to buy and the amount you want to invest. Unlike stocks, mutual funds require you invest a set dollar amount rather than purchasing a certain number of shares. In addition, you may be asked how you want dividend distributions handled: either by reinvesting them in the fund automatically or having them deposited into your investment account as cash.

Once you fill out the trade request, your trade remains pending until the fund's daily share value is calculated at the end of the trading day. Most mutual funds report their net asset value (NAV) by 6 p.m. EST. Once the NAV is reported, you know how many shares you have purchased.

It takes between one and three business days for your trade to "settle," meaning the official financial transaction is not completed right away. Investment firms and brokerage sites post information about how long it takes mutual fund trades to settle, but the SEC requires it to be no longer than three business days.

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