Anupama Nair
www.mediaeyenews.com
Long back, investors could only buy and sell mutual funds through financial professionals like brokers, money managers, and financial planners. But online investment platforms have made traders of us all, and today, anyone with a computer, a tablet, or even a smartphone can buy mutual funds. All you have to do is know where to buy them, what kind of fund you want, and what sort of fees, sales charges, and expenses you might encounter.
But today though a myriad of different investment websites-cum-trading platforms exists, there are three basic ways to purchase mutual funds online.
Investment Companies:
The most obvious option is to buy mutual funds directly through the investment companies that offer and manage them. Each firm offers at least a few different funds, from passive index funds to actively managed equity funds to high-yield bond funds, designed to appeal to different investors and different investment goals. One key advantage of buying directly from mutual fund companies — no sales commissions or brokerage fees. More of your investment money goes into the fund and right to work for you. The key downside are your investment options are limited to that company's family of funds.
Investment-cum-financial service companies:
If you do not want to be limited to one fund family, some investment companies allow you to use an in-house account to buy and sell mutual funds and exchange-traded funds (ETFs) offered by other firms. The Vanguard Group and Fidelity Investments are two of the best-known of this breed of mutual fund managers that have morphed into full-fledged financial services firms, augmenting their own funds with competitors' products. The catch: these firms naturally want to push their proprietary funds, so you may incur additional transaction fees or pay commissions if you go "outside the family."
Brokerage:
Yet another option is to open an online account at a brokerage. It will likely be the most expensive course. These types of accounts charge a transaction fee or commission for each trade, and they may also charge other account setup or maintenance fees. However, they will provide the biggest universe of mutual funds to choose from.
Setting up an online account:
Once you decide on the financial institution and trading platform for your account, you need to set up that account, which you can do, naturally, online. Most firms make it pretty easy, just log on to the company’s site and click a link that’s usually labeled ‘Open an account, let's get started, or something similar’. You'll answer the same questions needed to open any brokerage account i.e., personal info, type of account individual or joint etc.
You may also need to indicate whether you want any fund dividends deposited to your account or automatically re-invested back into the fund. You will have to furnish bank account information, to transfer the cash for your initial investment, and, if you so designate, to be used as the source for buying additional mutual fund shares each month. Many companies reduce the mandated sum to open an account if you set up one of these automatic investment programs. Applying online usually takes 10 to 20 minutes. Processing the application and getting your account funded usually takes one to three days.
Once your account is active, buying and selling mutual funds is simple. While each site is a little different, they all operate in essentially the same way. Indicate the ticker symbol of the fund you want to buy and the amount you want to invest, unlike stocks, mutual funds require you invest a set amount rather than purchasing a certain number of shares. In addition, you may be asked how you want dividend distributions handled (if you didn't set this up when applying) — either by using them to buy additional shares of the fund, or having them deposited into your investment account as cash. It takes between one and three business days for your trade to ‘settle’ meaning the official financial transaction is not completed right away. The SEC requires it to be no longer than two business days. Investment firms and brokerage sites post information about the time frame for mutual fund trades.
Once you've mastered the mechanics, the real work begins i.e., deciding what kind of mutual funds best suits your investment needs. Firstly, consider your risk tolerance. Typically, investments that offer the potential for big gains, such as high-yield mutual funds and most stock investments, also come with a greater amount of risk than investments that offer more modest returns. If you have a low-risk tolerance, avoid mutual funds that invest in highly volatile securities or employ aggressive investment strategies that seek to beat the market.
Then, determine what you are trying to accomplish with this investment. If you want something that generates consistent income each year, choose a mutual fund that pays dividends or a bond fund. If you want to minimize the short-term tax impact of your investment, choose a fund that makes very few annual distributions, and does not pay dividends and focuses on long-term growth. If your chief goal is to create wealth quickly, even if it means increased risk, look at high-yield bond or equity funds.
In reviewing mutual funds, you should be aware of the types of fees and expenses you are likely to incur. In some cases, the costs associated with a given mutual fund may render its returns considerably less impressive. The one cost, carried by all mutual funds is called an expense ratio. This is simply a percentage of the value of your investment, generally between 0.1% and 3%, the mutual fund charges each year to defray its administrative and operating costs. Actively managed funds typically have higher expense ratios than their passively managed counterparts because their increased trading activity generates more paperwork and requires more man-hours.
If the fund you choose has a particularly high expense ratio, make sure there is not a cheaper fund offered elsewhere with the same objectives and a similar portfolio. For indexed funds, especially, seek out the cheapest: Since they are designed to simply invest in all the securities of a given index, there is little difference between funds that are tracking the same index.
In addition to the annual expense charge, many mutual funds impose sales charges, known as loads. Set by the fund management, a load is essentially a fee paid to the broker, financer or investment advisor who sold you the fund. Load fees can be charged at the time of investment, or at redemption. Some funds are advertised as no-load funds. However, be aware they can still charge a number of other fees that make them just as expensive.
You should be careful to read the terms and conditions of your chosen fund to see if there are any charges, purchase or exchange fees to shareholders who wish to alter their initial investment by selling shares, buying additional shares or moving to another fund offered by the same firm. Many funds do, particularly if you make a change with 60 or 90 days of your initial purchase.
Documents needed to buy mutual funds:
To start investing in a fund scheme you need a PAN card, bank account and be KYC compliant. The bank account should be in the name of the investor with the Magnetic Ink Character Recognition (MICR) and Indian Financial System Code (IFSC) details. These details are mentioned on every cheque leaf and it is common for an agent or distributor to seek a cancelled bank-cheque leaf.
Documents required to be submitted along with KYC application are:
- Recent passport-size photograph
- Proof of identity such as a copy of PAN card or UID (Aadhaar) or passport or voter ID or driving license.
- Proof of address such as passport or driving license or ration card or registered lease/sale agreement of residence or latest bank account statement or passbook or latest telephone bill or latest electricity bill or latest gas bill, which are no later than three months.
