Finance, Forex and Investments

What are the costs involved in mutual funds?

If i invest 2-3K in mutual funds how does the process work? What are some resources for picking the company/fund? What are some possible costs? upfront or upon retrival or per year? Is there a minimum time I must leave my money in or can I take it out within a year or 3 or 5 if I want? Thanks! I want diversification. What about no-loads? Any downsides to these?

Public Comments

1. All funds operate differently. Some are front loaded meaning you pay a premium up front Some are back end loaded meaning you pay getting out Some have time limits, 15 to 30 days or more. Some have a limit based on how much you have invested. As far as resources, you have to decide if you want diversification or go into a sector.
2. There are 3 types of mutual funds more or less as far as cost structures go. 1. no load mutual funds, 2. load mutual funds 3. exchange traded mutual funds referred to as ETFs and closed end funds. No load mutual funds are purchased directly from the fund companies. Fidelity, T Rowe Price and Vanguard are among the most popular. They each have internet sites to sign up and also to do research. Load mutual funds are purchased through stock brokers. There are 2 options in buying load mutual funds--paying an up front sales charge of about 5.75% or a deferred sales charge. It can get complicated. Generally, these type funds, if you pay an up front sales charge have very low expense ratios, lower than no load funds. American Funds is the largest company offering these type funds. They have a very good record. They are also on the internet. ETFs are sold through stock brokers. There are two types--index funds and closed end funds. The first are unmanaged funds. They have extremely low expense ratios. The second are very similar to no load funds with some important differences. One difference is that they generally do not trade at net asset value as do open ended funds. Another is that they generally employ leverage in the form of preferred shares. Expense ratios generally run somewhere in the range of 0.6 to 2.5% of net assets annually for non-index funds and from 0.1 to 0.7% annually for index funds. If you buy and ETF you have to pay brokerage fees to buy and sell. If you buy a no load fund there is no fees for buying or selling. Some have somewhat high expense ratios. Some do not. Specifically, with American Funds even though you pay a 5.75% up front load, their expenses are so low that in 5 years time you will probably come out ahead. Most no load funds have at least a $2500 minimum investment. Some have a higher minimum, but those I mentioned are $2500. Load funds generally have a much lower minimum of about $500. With exchanged traded funds you can buy whatever you want.
3. There are many fund brokers out there which provides you a lot of choices on fund families, the best ones are Fidelity and Schwab. Once you find a broker, they normally have fund information, but you should also look into morningstar and Fund Mojo as 2 of the best resources to investigate on funds. Pick no load if possible, although some load fund provide better cost advantage in the long run, but you need to be very very careful on load fund. There is no lock on your money, you can sell anytime, although broker normally charge a transaction fee if you sell within 6 months.
4. Funds sold by an adviser usually carry a sales charge. The 3 basic types charges are categorized as share classes. These are designed for clients with a specific time line. A shares has the largest up front sales charge usually 4-6%, intended for clients who intend to hold their investment for 7 years or more. B shares have a decreasing sales charge (called a CDSC) usually going from 5%-0% over a 6 year period before converting to A shares. Think of it as a decreasing penalty on your purchase amount. They have a slightly higher internal expense, designed for those holding funds from 2-6 years. C shares have a 1 year CDSC or 1%. So if you invest $2,000 and pull out in the first year you'll pay $20. They have the highest operating expenses and are intended for those who intend to hold funds for 2 years or less. You'll notice A share earns more when the time period is more than 7 years, B shares from 0-5 years. C shares earn the least because of the higher cost, but also don't have that 5% penalty the first year. Those penalties can be avoided by switching within the same fund family (group of funds that a specific company sells). No load funds have no sales charges and are purchased directly from the fund company or a self directed brokerage account (one with no adviser, only online tools and a call center to help you). They have no up front cost or decreasing penalty but sometimes have high expense ratios (the percentage it cost to operate the fund). The downside is that if you're unsatisfied with the performance you have no one to blame but yourself. Use a fund screener through yahoo finance or morningstar.com to make your choice. There are asset allocated funds that have diversification built into them. I would suggest no load funds for you since you're just getting started and most advisers won't pay much attention to a $2000 client. They're usually commission only and you won't receive very good service. Be prepared to commit to a fund or group of funds for a long period of time. Just do the research and make an educated decision.