Mutual funds can be a great investment tool when saving for retirement. It’s important, however, to understand mutual fund basics. These concepts can help you increase your rates of return, avoid unnecessary fees and meet your investment objectives. Using these ideas can make a huge impact on your investment performance over the long term.
Your guidebook for mutual fund investing is the fund’s prospectus. The Securities and Exchange Commission (SEC) requires each fund to be sold by prospectus.
Sale Charges vs. Annual Expenses
Everything has a cost, including mutual funds. Generally, funds assess costs in two ways: sales charges and annual expenses.
Sales charges, or sales loads, can be assessed in a variety of ways. The charge can be imposed on the front end when the dollars are initially invested, assessed each year or at the back end when funds are withdrawn.
The fund’s operating expenses are paid through an annual expense, which is charged to investors. Both sales charges and annual expenses are stated as a percentage of the assets invested.
Deciding on Fund Costs
A fund investor needs to know several things when making decisions about costs. First, what is the amount of the sales charge, and when is it paid? Second, what is the fund’s annual expense? Third, are the charges reasonable?
These issues are addressed in the prospectus. You can also find information on fund fees and investment performance online. Morningstar is a great site that provides concise information about mutual funds. This link explains American Fund’s Washington Mutual fund, an investment that has been around for decades.
Saving Money Using Breakpoints
Another feature to keep in mind is breakpoints. A breakpoint is a quantity discount you can earn by investing in a fund family. American Funds, for example, is a fund family that provides dozens of mutual funds. If you choose to diversify your holdings by using a variety of American Fund products, you receive a discounted sales charge.
Fund Distributions and Taxes
Assuming that you invest in a taxable mutual fund, you are taxed on both dividends earned on stock holdings and capital gains on both stock and bonds. Keep in mind that the fund must have both a buy and a sell to generate a capital gain.
How Much Help Do You Need?
Some investors prefer working with a full-service financial adviser. Others like to do their own research and require less help. Charles Schwab, for example, allows investors to choose from a variety of advice platforms, depending on their comfort level.
Regardless of how you find advice, do your homework. A well-educated investor can make decisions that lower fund fees and increase potential investment returns.