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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Tuesday, May 16, 2006

Buying Mutual Funds

As discussed before there are literally thousands of choices when buying a mutual fund. (Remember that your portfolio needs to be diversified)

So if you think you should buy mutual funds through your broker or on your online brokerage house weigh this information first. Your broker will probably point you towards funds that his firm has a relationship with and probably there will be a front or back load charge on it. Do you want to pay 4-8% if you do not have to? Especially when it might not be in your best interest?

Many also consider their online brokerage house--not a bad idea if you are poorly organized and do not want statements from many different funds. However, purchasing a mutual is not free when doing it on your online brokerage account. Let's say the fee is $20 for a transaction. You invest $1,000--right off the bat you are down 2%. Now you find out it is not a good fund 6 months later because it is down 10%=$882. Instead of losing 10% you now are selling(another $20 transaction fee) and that equals $862 and you are -13.8% instead of -10%. If you are investing thousands and thousands of dollars then these fees are not as prominent. However, if you are a small investor these fees can hurt your portfolio in the long run.

So if you do not mind the extra paperwork, purchase your mutual funds directly through the mutual fund--there are no transaction costs unless you hold it for a short period of time (Redemption fee if owned under 1 month usually).

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