Mutual Funds: How To Buy & Sell
Some mutual funds can be bought and sold directly from the mutual fund company. Others are sold mainly through online and traditional
offline brokers, banks, financial planners or insurance agents. Many people buy mutual funds through their
401(k) plan.
All mutual funds will buy back (
redeem) your shares on any business day and must send you the payment within seven days.
Mutual funds are easy to buy and easy to sell.
Many mutual funds set a minimum dollar amount for the initial investment. Some set a minimum dollar amount for future, subsequent
investments.
Mutual funds do not trade like stocks. The buying and selling transactions occur at the end of the day. This is because mutual funds
prices are set by their Net Asset Value (see
NAV below) at the end of each trading day.
Another way mutual funds to not trade like stocks is that you buy mutual funds based on a dollar investment amount you set, rather
than buy a defined whole number of shares. As a result, you purchase fractional shares of a mutual fund.
Example: This simple example uses easy numbers and ignores all fees and expenses. You invest $100 in a
mutual fund that trades at $55.00 (the NAV). If you were buying a stock priced at $55.00 per share, you could buy only 1 share. You
would spend $55.00 and the remaning $45.00 would not be invested. Because a mutual fund allows fractional shares, you would invest
the entire $100 and you would own 1.82 shares.
Net Asset Value (NAV)
The
net asset value (NAV) is the company’s total assets (what it owns) minus its total liabilities (what it owes).
The value of one share in a fund is called the
per share net asset value (per share NAV). The “per share NAV”
is the NAV divided by the number of shares outstanding.
The per share NAV is in most major newspapers as well as at many web sites including Google and Yahoo. Look for the data in
the column labeled “NAV.”
A fund’s net asset value goes up or down daily as its holdings change in value. Mutual funds generally calculate their NAV at least
once every business day, usually after the major exchanges close.
Fees Matter When You Buy & Sell Mutual Funds
When you buy shares in a mutual fund, you pay the current net asset value per share plus any fees charged by the fund such as
sales charges (also called a
sales load) or purchase fees.
When you sell your shares, the mutual fund company pays you the approximate per share NAV, less any any fees
that the fund deducts at that time (such as deferred sales loads or redemption fees.
Example: Our simple example assumes no sales load (no sales charge). Invest $1,000 in a mutual fund with per share NAV of $1. You will
own 100 shares of the fund. If the per share NAV drops to $0.90 because the value of the fund’s portfolio drops, you still own
100 shares, but your investment is now worth $900. If the per share NAV goes up to $1.10, your investment is now worth $1,100.
There is much more about fees and expenses that every mutual fund investor needs to be aware of. See
Understanding Costs for
more about fees and expenses.
Next: Investment Basics
