Investing in mutual funds is a simple process, though you need to research your investments before you jump in and buy. If you manage your accounts online, the entire process can be nearly paper free, from making your initial investment through the eventual selling process. Determine which funds make the most sense for you and how much you want to invest, and you'll be on your way to building your portfolio.
Get started by selecting a mutual fund family. Some offer a limited selection of funds, as few as a dozen, but may be suitable if you are looking for a few core holdings. For greater diversification, you'll want to find a provider with many options, as many as hundreds of different funds. When you choose the funds you want to buy, your purchase price will be the fund's per share net asset value (NAV) for that day. If you are investing in mutual funds within your employer-sponsored 401(k) plan, the investments will come out monthly as payroll deductions. Transactions can take place online, by phone, or via snail mail.
Where Does Your Money Go
When you buy shares in a mutual fund, you are buying a fraction of each investment that fund holds. Before you buy read the fund prospectus, an informational booklet that details where the fund invests its money and its goals. For example, if you buy an international bond fund the prospectus will break down which countries it invests in. The fund's manager decides when to buy or sell individual holdings within the fund. A small percentage of your money will be applied towards administrative expenses.
After your initial investment you can either set up regular investments or submit payments at random. Even if you make regular payments you can always make an additional, extra investment. Stock and bond funds will occasionally pay dividends or bond payouts, and you can either collect the money or reinvest the proceeds right back into the fund.
Even if you reinvest your dividends and payouts, you will still have to pay income tax on your earnings. The mutual fund company sends an annual statement after the end of each year detailing any dividends or capital gains so that you can report them. If your mutual funds are held within a retirement account, like a 401(k) or IRA, the earnings will reinvest without any tax consequences.
Selling and Reinvesting
Selling works very much like buying. You place an order to sell, and the dollar amount or number of shares you specify are sold based on the NAV at the end of that day. You can receive the proceeds in cash, or you can reinvest them into a different fund. Sales outside of retirement accounts are subject to capital gains taxes or capital loss deductions.
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.