There are many sources where it is possible to buy mutual funds. Banks, Insurance companies, brokerage houses, discount brokers and advisers, and mutual fund companies have a means of buying and selling mutual funds through them. Many people make a wrong assumption that mutual funds bought from banks are as safe as CDs, for example, which are insured by the federal government for up to $100,000, but the truth of the matter is they are not. Since it is possible to lose the whole investment, investors cannot hold the banks or anyone else responsible for any loss they might suffer, since it is an investment instruments where investors would consent in advance to be willing to take the risk of losing their total investment if things turn out to be bad.
However, such a disaster does not happen in the world of mutual funds often, as they are the safest investment vehicles around. The reason why they are safe is professionals whose livelihood depends on the good performance of the funds manage them. This means even if they will not be held responsible if they lose a huge amount of invested money, because of something that is beyond their control, they will be hit by a double whammy, one of which would be losing their own livelihood.
To come back to the banks, they always sell other company’s mutual funds by making an arrangement either to give them an outlet in some of their branches where the service given will be clearly marked or the banks themselves will sell a given mutual fund families to their customers on behalf of mutual fund companies and they charge either commission or service charge that could amount from 5% to 8.5%. One reason why buyers are attracted to mutual funds sold by banks is they allow their account holding customers to start investing in a mutual fund with as low as $25 initial deposit that will be deducted from the customers’ account. Some if not all mutual fund companies also have a buying plan that will start from $50 and up where some of them require up to $50,000 initial deposit.
This is where the disadvantage of buying funds from banks will become obvious because there is a high service charge and commission attached to it. The other disadvantage is their knowledge concerning the performance of the various funds they are selling could be limited since being knowledgeable with the funds would require doing it in a full time basis. That is why the advice is to avoid banks in spite of the small initial deposit they require.
The same applies to insurance companies that are selling mutual funds for the hefty commission and service charge they are getting. Most of the time they would link the mutual funds they are selling with annuities but that robs mutual funds a few of their advantages, which are liquidity and low service fee. The myth that mutual funds bought from insurance companies are safe is not true either, since they are not insured and if the fund they are selling develops any problem the investors will suffer the consequence.
Stock brokers and investment advisers are also the same because they charge a hefty fee like the others for investing on behalf of the customers where some of them would also require a share in the investment as it matures. One thing to mention here is all of the above sources are selling a loaded fund, which means there is some kind a service charge to be paid in order to buy the funds. Funds labeled as front-end load are funds where investors will have to pay commission when they buy the funds and the end-load funds are funds that are required to pay commission when redeemed. There are also what are known as constant funds and such funds charge commission on a yearly basis. This means, in no occasion at all, these middlemen companies sell a no-load fund that does not have a service charge or a commission attached to it. The main disadvantage of such funds is the service charge will eat into the amount of money generated.
One example cited was if a young person invests $1000 at the age of 20, at retirement time the fund will generate up to $130,000 and what the investor will get is a mere $30,000. The rest of the money will go for the service charge, the reason why mutual funds are lucrative for those who are managing them.
The better source to buy mutual funds from are the discount brokers whose only job is to avail a big number of mutual funds to investors and they charge a onetime low service charge whenever investors buy or sell through a system they have put in place and what they charge has nothing to do with the amount of the investment unlike the others who are charging a percentage of what is generated. Some of the new online investing companies are availing such a service where the only requirement is the investors will have to be savvy about the funds they are buying. Otherwise they might have to pay for advice somewhere else, which will not be as expensive as paying a percentage of what the funds generate and once they acquired the knowledge they can easily take charge of their own investment. This route, of course, is not recommended for everyone, yet instead of paying someone to invest the money to mutual fund companies that would also charge for their service, it is much better to get advice on a big number of funds and work with discount brokers.
Nevertheless, the best place to buy mutual funds without worrying about additional cost other than what the fund managers charge is to buy the funds from the companies themselves who have a direct access for anyone who wants to buy funds from them and the funds they sell are no-load funds that does not have extra expense in a form transaction cost. As usual, to take advantage of what the mutual fund companies are offering it requires to be savvy about the mutual funds, which is not a difficult task for most investors. But those who do not have the time and might feel safe if professionals do the job for them, the only disadvantage they will endure is sharing what they earn with whoever is in charge of their investment and that could add up and deplete an otherwise healthy return on an investment.
Consequently, in order not to miss out from the advantages of owning mutual funds that are a pool of money collected from various sources and are invested in the most safest form of investment instruments such as bonds, securities, and well performing stocks, it requires to make a well informed buying decision. The reason why it is so is, no matter how hefty the return is if the avoidable commission and service charge are high, it would not be worth the effort. Hence, it is always recommended to walk the required distance to be equipped with what it takes to be a savvy investor and it is only then realizing a good return on the invested money will be possible.
