Step 1: What's the Best Way to Buy Fund Shares?
A variety of useful shareholder options exist for investing and withdrawing money, both on an individual transaction and a systematic basis. By using services like those examined here, you may be able to manage your investments in a simpler, more efficient manner. This may even lead to improved results. Since our coverage is quite comprehensive, you may not find all the services discussed offered by the mutual funds you deal with. In addition, individual procedures can vary somewhat among funds.
Making Your First Investment
The traditional way of investing in a fund is simply to place a check in the mail. But it could take up to a week—or longer—for your money to arrive and be put to work. By letting a few days elapse you risk paying more per share for a volatile fund than you had expected. Of course, if you're lucky you might pay less.
It frequently makes sense to have a better idea about the price you will pay, especially if you're going to invest a fairly large sum in a more volatile fund. By taking action prior to 4 p.m. Eastern time, it's possible to buy at the price prevailing on the day you place your order. Of course, the price you'll pay is not the only consideration—putting the money to work sooner is beneficial to fixed-income investors who are placing a large amount—say $50,000 or more—into an account and don't want to wait to begin accruing dividends.
There are several ways to accomplish the purchase of shares at that day's net asset value:
-
Transfer from a money fund. You can park your investment in the family's money market fund, wait until you're ready to invest, call the company before 4 p.m. Eastern time and request that the funds be transferred to the portfolio of your choice. Of course, you can usually also transfer from other bond and stock funds in the group. Most fund groups also support on-line purchase and sale of mutual funds through a secure Web site.
-
Wire transfer from your bank. This is the quickest way to move money and is especially recommended for large sums. You will buy in at the day's net asset value if the wire arrives at your account prior to 4 p.m. Eastern time. Your fund company will provide the instructions that you need to convey to your bank. Banks generally charge for this service but mutual funds usually do not. (Incidentally, if you invest by wire you can redeem immediately if you need to—there is no clearing period before your funds will be released.)
-
Telephone purchase. Some companies allow you to place a purchase order by phone, locking in that day's price if your order is entered before 4 p.m. Eastern time. You give your instructions to the telephone representative, then send a check or wire for the cost. The payment must reach the account in five to seven business days (depending on the requirements of the company), otherwise the order will be canceled with the investor assuming any resultant losses. Some funds will only accept wires for telephone purchases. There are special conditions that need to be satisfied when you place a telephone purchase order. These requirements, which vary by company, typically include investment minimums and maximums. Minimums may or may not be higher than the fund's usual investment minimum and could be $5,000 or $10,000. The maximum may be based on the total value of your existing accounts with the family. The details should be spelled out in the prospectus. It's best to verify the information with a shareholder representative before entering your order.
-
Opening a new account by wire. A number of mutual funds allow you to establish an account by wire, provided you promptly send in a completed application and wire in the cost of your shares. If your wire arrives at your new account before 4 p.m. Eastern time you will buy at the current day's price. Again, there are minimum investment requirements and other details which vary by fund. The first step is to phone for instructions.
Making Systematic Investments
The best way to build up your mutual fund assets is simply to put money to work on a regular basis. Modest, ongoing investments can be relatively painless and may eventually lead to significant wealth. For example, at 10% compounded annually, $100 invested at the beginning of each month would grow to $76,566 in 20 years; continuing the investments for just five additional years yields $133,780.
Systematic investment plans offer an ideal way to benefit from dollar-cost averaging. With fixed, periodic investments, you buy more shares when prices are low and fewer when they're high. This results in a lower average cost per share than a simple average of prices on your purchase dates. Dollar-cost averaging works especially well with more volatile portfolios.
There are several ways periodic investments can be made automatically, without sending in a check.
-
Direct, systematic transfers. The systematic investment program, where money is taken either from your bank account or paycheck, transfers a predetermined, fixed amount at approximately the same date each month. In order for the payments to be routed directly from your bank account, your financial institution must be an Automated Clearing House (ACH) member, which most are. If you want the investment deducted directly from your paycheck, you need your employer's consent. In addition to the ACH periodic purchase you can make individual ACH purchases in varying amounts whenever you like by phoning your fund company. You would be purchasing your shares at the next business day's price if you call prior to the market's 4 p.m. closing. If you call after 4 p.m., you would buy at the price prevailing at the close of the second business day.
-
Dividend transfers. By investing periodic distributions received from one mutual fund into shares of another in the same family, you can build a position in the latter. For example, the monthly dividends from a fixed-income fund could be moved into a small-cap portfolio. Although dividends from investment income are not fixed in amount like systematic purchases, they can be sufficiently stable. It wouldn't take an enormous investment in a fixed-income fund to generate $100 monthly in dividends. Another example might be the transfer of quarterly income dividends and annual capital gains distributions from a large-cap fund into shares of a money market or short-term bond fund.
Continue to Step 2 »
