What is a mutual fund?
A mutual fund is a way to invest your money in a program funded by shareholders which is professionally managed. This means that you’ll put your money into a mutual fund account and investment professionals will do all the work for you. There’s no need to track your holdings on a day to day basis or make trades when things are going well or poor. The money managers behind your mutual fund do this for a living so depending on which mutual fund you choose, it’s quite a safe vehicle for creating wealth!
I like to think of a mutual fund like this..
It’s a group of companies (let’s use an example of a mutual fund with Apple, Amazon and Home Depot). You’re going to pay one price to buy into those 3 companies at once. If this make-believe stock was $5 per share and you had $100 to invest, you would be buying 50 shares. If Apple, Amazon and Home depot do well and are profitable, your shares will begin to slowly rise. When you want your money out of the mutual fund, you simply sell your shares (which would now be at a higher per share cost than what you bought them for, therefore would make money!
One thing I love about mutual funds is that they allow any type of investor to join. You don’t need a 10k minimum to begin investing. A beginner investor can start as soon as they are ready.
What is ETrade?
ETrade is one of many companies that can hold your mutual funds for you and allow you to choose from more than 9,000 mutual funds. Some may have fees to join but many have no fees at all. ETrade offers a Fund Screener to help you analyze different funds and find the right choice for you and your risk level that you’re comfortable with. ETrade also has a feature that will allow you to re-invest any earnings you’ve made from your mutual fund automatically back INTO your mutual fund in order to have it continue to grow and grow at a faster rate.
Are there Fees Associated With Mutual Funds?
Typically yes. There are fees associated with mutual funds. When you purchase into a mutual fund, make sure to check the expense ratio which tells you the percentage of fees you will be paying to be a part of that mutual fund. This annual fee is the percentage that will go to your team of money managers to run your fund. You will hear that your fees will either be front loaded or back loaded. What’s the difference between the two? Front loaded fees are assessed at the time you purchase the funds. In retrospect, back-end loaded mutual funds will be taken out when you actually sell your shares in the fund to cash out.
There are situations when you could find a mutual fund that has no fees aka a no-load mutual fund but most companies that are managed by a team of investors will have some type of fee.
In my opinion, a small fee is okay to pay when it allows me to be completely hands off from it and just “set it and forget it!”
What’s a good expense ratio for a mutual fund?
I would try to keep your mutual fund’s expense ratio below 1%.
Example: You have a mutual fund with a 1% expense ratio – it will cost you $10 for every $1,000 to have this money managed for you. Obviously, that’s quite a hit on investment returns so please do your homework before buying a mutual fund to make sure you are comfortable with it’s expense ratio.
What ETrade mutual funds should I buy?
This is a question I can’t answer for everyone since everyone’s risk levels, age and goals are different. I can, however, help to name a few successful ETrade Mutual Funds that have proven success. I personally have my ETrade Mutual Funds sitting in PRIMECAP ODYSSEY GROWTH (POGRX) because it works well for my goals and my risk levels.
A few things to look into before you decide on which mutual fund to buy are…
- Expense Ratio – As we discussed above. The lower expense ratio, the less you’ll have to pay in fees. Keep this under 1%.
- Front-Load/Back-Load/No-Load – remember front load have fees taken when purchasing the fund, back load have fees when selling the fund and no-load have NO FEES. If you find a good no-load mutual fund, stand up and do a happy dance right now because you’re saving yourself a lot of money in the future.
- Turnover Ratio – Look for funds with a low turnover ratio. This is the percentage that each fund is bought and sold each year. I seem to find that the lower the turnover ratio, the more confident my money managers are on their investment choices for the long haul. I would look for no higher than 50% of a turnover ratio, but would ideally look for one around 20% turnover.
- Choose a reputable company to manage your fund – ETrade is a very well known management company that I whole heartily trust however there are many other management firms that can help you. Do your homework before buying!
How to Buy ETrade Mutual Funds
- Open an ETrade account.
- Go to Research > Mutual Funds
- Search for the type of mutual fund you want to buy (if you don’t know which one already). You can choose a fund family which is who runs the fund. For my POGRX fund, I would select PRIMECAP ODYSSEY FUND. If you have no idea, you’d just select All Fund Families. You can also select based on Performance on which funds you’d like to see based on a time frame and how well they have done. Here’s where you’ll select an expense ratio (remember to look for ones below 1% expense ratio!!). The fees can be selected here (as we talked about above). After all your criteria has been selected, hit your View Matches button to see what it finds for you!
I don’t think it could get any easier than that, right??
Review your Mutual Fund
- Review your options and make sure to research, research, research and compare before choosing which is best! Once you have your mind made, you’ll click the green BUY button.
- Now you’ll review the fees and make your investment. A few things to note on this screen:
- Enter the amount you want to invest in the Investment Amount box.
- LOOK AT THE BOX ON THE RIGHT. This is very important. The Minimum purchase requirements – Initial is set to $2,000. This means means that you need to invest at LEAST $2,000 in the beginning to start this fund. In the future, if you want to add more to your fund, the subsequent cost would be $0. This means that it would be no cost to add more. If your fund had a subsequent of $50, that means that you would need $50 to invest more each time.
- The transaction fee is a one time fee to purchase this mutual fund. When adding your investment amount, keep in mind that $19.99 will come out of it to join. This is a one time fee to buy into the fee.
- Once reviewed, click the green preview button to preview your order and submit it.
- You are now the proud owner of a new mutual fund.
- The last step is to sit back and watch your money grow!! Since you have money managers working for you, you don’t even have to do anything to it. Just set it and forget it!