Buy Mutual Equity Funds Online Easily
The Wall Street Journal recently published a report that investors had dumped most of their global stock funds. In May alone, the total AUM of these funds dropped by $20 billion, which is a record decline. This was especially surprising following a previous report that ETFs and mutual funds had recorded over 20% growth in 2018. All this has got to have you wondering what exactly these funds are, and BuyStocksEasy is here to help. Our team of experts comprises of market experts who understand exactly what these mutual equity funds are and how to invest in them so that you become one of those who earned those returns. At the end, we will show you which brokers are the most efficient in providing mutual funds for their clients with the help of The Best Trading Brokers.
What are mutual equity funds?
Mutual equity funds are a type of mutual fund that invests primarily in stocks. The concept combines the structure of mutual funds with that of equity/stock funds. Therefore, in order to understand what they are and how they function, we have to look at both of them separately first.
Mutual funds are quite common, and they are known as an effective tool used by investors to diversify their portfolios. A simple way to think about it is as a pool of money that can be used to buy many different assets ranging from stocks, bonds, commodities, etc. Because the fund has a lot of capital, it is able to buy many pieces of assets, thereby creating a diversified portfolio that is less prone to drawdown. When an investor puts their money in a mutual fund, they are basically buying shares in the fund. And as a shareholder, they get to enjoy the profits made proportional to their investment; and they suffer the losses too.
Profits in a mutual fund are realized in three main ways. The first is in the actual share price of the fund. As mentioned before, mutual funds operate much like a company with shares and when the share price goes up, an investor can choose to sell their shares. The second is through dividends or interest earned from assets the fund holds. Remember that the fund buys huge chunks of actual securities, and when these companies issue dividends or bonds yield interest, all shareholders get a piece. Thirdly, the fund may choose to sell some of the assets it holds. If it does so and the asset had increased in price, then the profit is distributed to shareholders.
A stock fund (also known as an equity fund), on the other hand, just refers to any fund that invests only in stocks with only a little of the fund being in cash. The only difference between stock funds is in where the money is invested and for what purpose. In terms of allocation, some funds choose to invest in a particular class of stocks such as large-cap, mid-cap or small-cap; or select stocks from a particular country. A stock fund should also consider the goals it intends to achieve. Some funds focus on value, which is to generate profit over a shorter period, while others focus on growth and they are meant to grow steadily over time.
When the two aspects are combined, you realize that a mutual equity fund is just a mutual fund that specializes in buying stocks like a stock fund. However, it is the structure of an equity fund that determines how returns are distributed to shareholders and the laws that apply.
Why should you invest in mutual equity funds?
The primary reason why investors buy into mutual equity funds or any other type of mutual fund is to diversify their portfolio and hedge against risk. A mutual equity fund like the Vanguard Total Stock Market Index invests in 3,609 holdings with 99% of the funds being allocated to stocks and the rest in cash. With such a fund, it is nearly impossible to experience continuous drawdown over months. That is because, even if one sector of the financial markets are not doing good, another well-performing sector will pick up the slack. Recently, stocks in the medical sector have been performing superbly, and these have made up for losses in the tech sector. For this reason, many investors put their money in mutual equity funds like the VTSMX to make sure they are safe from price fluctuations. Moreover, investors who already own individual stocks will also buy into mutual funds to mitigate losses if and when they occur, especially when the economy is uncertain such as now with the trade wars going on.
Apart from just ensuring that their investment is safe, investors also enjoy lower costs when buying mutual funds than stocks and other assets. The Best Trading Brokers lists the most affordable brokers to work with, but even they have much higher fees when buying stocks. A typical broker will either charge a flat fee of about $10 and above for every trade, but mutual funds have a very low expense ratio below 0.5%. Add to that, stockbrokers may have additional charges such as broker fees and management fees. Mutual funds are free from all these. As an investor, you must think of ways to cut back on costs wherever you can, which is why so many have chosen to go with funds. Mutual funds are able to charge such low fees because buying shares in bulk is cheaper than buying individually without a huge capital.
Finally, mutual funds are actively managed by a professional trader, which generally means better performance. It’s possible for anyone to learn how to invest and it is what we do here at BuyStocksEasy, but it is also much better when a professional does the work. Not only are they more knowledgeable, but they can dedicate all their effort into the fund 24/7 to make sure it performs well.
Why not to invest in mutual funds
Despite the advantages mutual funds provide to investors, there are still some drawbacks you need to be aware of before you invest. Nothing is perfect, and it is always better to know that there are landmines along the way rather than lose a leg; metaphorically, of course. The first problem with mutual funds is in their actual performance despite being managed by a professional. Research by Morningstar found that only 38% of actively managed stock funds did better than passive funds. In case you don’t know, passive funds are those that don’t have a manager but instead often follow indices.
These are called index funds, and even the best investors like Warren Buffett have championed them over active management. In an interview with CNBC, the Oracle of Omaha claimed that someone who invested $10,000 in the S&P 500 in 1942 would have $51 million today. He went further to say even his best stock-pickers haven’t been able to beat the S&P 500’s performance. This goes to show you that you really have to be careful when investing in mutual equity funds. But you can get a leg up if you choose a good broker trough The Best Trading Brokers because they make sure you have the best access to the markets. that plus the advice on BuyStocksEasy should give you an edge over other investors.
The other problem with mutual funds is the costs involved. Now you’re probably wondering how that could be when the charges are so low, but this is because of other fees. The main fee is, of course, the operating fee known as expense ratio, but that isn’t too much. But then there are shareholder fees such as commissions, sales charges, and redemption fees. Sales charges can either be front-end loaded (charged when buying into the fund) or back-end loaded (charged when selling out of the fund). Finally, all the earnings an investor receives from the fund are taxed as capital gains. These taxes can be quite high thereby reducing the profits earned, and you still get charged even if you reinvest into the fund. All these costs can be a bummer and make mutual funds somewhat unattractive. Nevertheless, considering that you’re still earning a good profit at the end of the day makes up for the nuisance.
How do they compare to ETFs?
Mutual funds are often compared to exchange-traded funds because they have the same basic structure. In fact, ETFs that focus solely is very similar to mutual equity funds in the way they operate, but they are not the same. For one, ETFs are not always charged capital gains taxes for earnings unless the investor cashes out. If you choose to reinvest, you don’t get taxed for the earnings. This makes ETFs much more tax efficient for the investor who wishes to invest in the long term.
Add to that, mutual funds cannot be traded freely all through the day as one would ETFs. To keep the value of ETFs similar to the net asset value (NAV), an arbitrage system is used to balance the supply and demand peaks. As for mutual funds, redemptions can only be made at the end of the trading day, making it unsuitable for speculators and day trading. For an ‘smaller’ investor, another let-down with mutual funds may be their high capital requirements. In order to invest in mutual equity funds, even The Best Trading Brokers indicate that there will be a minimum opening amount of capital required. That makes things more difficult, unlike ETFs where your money is always welcome no matter the amount.
How to invest in mutual funds
It’s natural by now to start asking yourself how you can get in on mutual equity funds, and fortunately, the process is quite simple. All you would need is to identify a broker who can issue you with shares in the fund. The Best Trading Brokers are always on the lookout for excellent brokers that have the most positive responses from their clients so that you can avoid scam brokers. That is the first step you have to make when planning to buy mutual equity funds, but once you have found the best broker, you are already halfway there.
We took the advice of The Best Trading Brokers and came up with the top 3 brokers you should consider based on their features:
- Charles Schwab – in case you didn’t know, mutual funds’ brokers are in the midst of a price war to see who can offer their services at the lowest cost. To this end, many brokers have no-fee and no-load funds, and this one, in particular, has over 4,000 such offerings
- Vanguard – you wouldn’t expect the world’s largest provider of mutual funds to go unmentioned, would you? This broker has plenty of mutual funds that account for its $5.3 trillion AUM, and all of them are known to be very low-cost
- Fidelity – another major player in the mutual fund market, Fidelity also has no-fee offerings, but you would still have to pay for the withdraw and deposit transactions
The next thing to keep in mind is that all these brokers will have a minimum account balance they expect all investors to achieve before they can start trading. As already discussed, this is one of the few disadvantages in mutual funds. It’s also completely unreasonable considering that these instruments are not covered by the FDIC and thus not insured. Therefore, you would have to suffer any losses you experience even when it’s the broker who went bust. Once again, this proves the value of a service like The Best Trading Brokers who always tell you who you can and cannot trust. It’s not always easy to do so, but with a trusted partner you can sleep better at night.