Buying Mutual Funds



If you have decided to buy an index fund, there are two ways for you to purchase the fund: buying directly from the fund sponsors or buying through a broker.

Buy Directly From The Fund
You can buy funds directly from big fund companies like Vanguard and Fidelity without going through a broker. As long as you meet the fund’s minimum purchase requirements, you can buy as many shares of the fund as you’d like at the stated NAV (net asset value). The advantage here is that you don’t have to pay any additional fees to a broker.

For beginning investors who wish to buy one index fund from only one fund company, this is the best and cheapest alternative available. To buy the fund directly from the company, call them for an application, mail it in with the minimum balance required, and you are all set. Of course, if you are a minor, you will need a custodial account to buy mutual funds. 

Buy Through A Broker
If on the other hand, you want to buy a mixture of funds from different companies such as Vanguard, Fidelity, Schwab, and T. Rowe Price, it probably makes sense to use a broker. With an online broker, once you fill out an application to buy and sell stocks and funds, you can buy any variety of stocks and mutual funds you want.

By contrast, if you wanted to buy a variety of funds directly from different companies, you would have to fill out an application for each company and this could be a pain in the neck. The disadvantage with a broker is that the convenience of having a smorgasbord of funds to choose from will cost you. In addition, not all deep-discount online brokers offer a wide selection of funds to choose from. If you want to be able to buy both stocks and mutual funds from an online broker, make sure to ask whether indeed you can do so before signing up with the broker. (Refer to our list of Affordable Online Brokers)

Buy Periodically
For index funds, we suggest that you use the dollar-cost averaging method of stock purchases (see an explanation of dollar-cost averaging). With this method, you invest the same dollar amount in buying stocks or mutual funds each month (or in other periods such as every two months), thus avoiding the risk with trying to time the market.