Investing comes with costs beyond the risk of losing your money. If you're not careful, trading mutual funds -- even if you're in for the long-term -- can result in a trap of fees and expenses. Since all mutual funds come with attendant expense ratios, generally somewhere in the neighborhood of one percent, you'll never find a wholly fee-free fund. You can, however, trade funds commission-free and without additional charges under several scenarios.
Invest in a mutual fund directly through the fund company. Not all fund companies offer their funds directly; however, most, particularly the big names, do. And they don't charge a commission to buy or sell their funds if you purchase straight from the source. Most mutual fund firms enable online account applications. Alternatively, you should be able to set up an account over the phone or via snail mail with a paper application.
Buy a mutual fund through a brokerage account that offers the fund of interest commission-free. If you open a brokerage account through a fund company, you can generally trade that firm's funds commission-free. Some brokerages have a list of mutual funds that you can trade through them commission-free. It's sort of like getting frequent flier miles on a whole bunch of airlines with a card through just one carrier.
Avoid mutual funds that charge a redemption fee. While you can skirt commissions if you watch where you trade, you can't escape redemption fees. Read the fine print of the fund's prospectus or fact sheet, available at the fund's website, to see if it charges a redemption fee. Before submitting a mutual fund order with your brokerage or at a fund's site, you'll be warned if the fund charges a redemption fee. Federal regulations cap redemption fees at two percent, according to the U.S. Securities and Exchange Commission. Funds charge them when you redeem shares, although some only charge it if you sell within a certain time period, such as 90 days.
Beware of mutual funds that charge a sales load. Some charge a sales load when you make an investment, others wait until you cash out. In either case, federal regulations limit sales loads to 8.5 percent. A sales load pays middlemen, known as brokers, who market and offer a firm's slate of mutual fund offerings. You can find out if a fund charges a load the same way you do a redemption fee, by reading the fund's prospectus, fact sheet or reading the fine print before submitting a mutual fund trade. Look for funds that are specifically described as "no-load."
- Proceed with caution if you are looking to trade a mutual fund from one firm in a brokerage account you hold with another mutual fund company. For example, as of November 2010, although T. Rowe Price offers many non-T. Rowe Price Funds commission-free, it charges a $35.00 transaction to trade many others. This practice is representative of the industry.
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