How to Buy and Sell Mutual Funds -The 4 Step Process

How to Buy and Sell Mutual Funds: A Step-by-Step Guide for Individual Investors

If you're ready to buy or sell mutual funds, it’s crucial to know the right process and strategies to make informed decisions.

From setting up your investment account to researching mutual funds and placing your buy and sell orders, this guide will walk you through everything you need to know about how to navigate the process confidently.

How to Buy Mutual Funds

1. Define Your Investment Goals

Before diving into mutual fund purchases, the first and most important step is to define your investment goals. Your goals will help determine the right type of mutual fund for you.

Ask yourself: Are you saving for retirement? Looking to grow your wealth over time? Or are you trying to generate a steady income stream?

Your goal will help guide the selection of the mutual funds that best fit your investment strategy.

Whether you’re seeking long-term growth, income, or a balanced approach, identifying your goal is key to narrowing down the universe of funds available to you.

2. Open an Investment Account

To buy mutual funds, you’ll need an investment account. There are several options available for you to consider:

• Online Brokerage Account: Online brokerage firms like Vanguard, Fidelity, and Charles Schwab allow you to easily access a wide selection of mutual funds. These platforms typically have tools and research available to help you choose funds.
• Robo-Advisors: If you prefer a hands-off approach, robo-advisors such as Betterment or Wealthfront will select and manage mutual funds for you based on your investment goals and risk tolerance.
• Direct Purchase from Fund Companies: Some mutual funds can be purchased directly from the company that manages them. For example, you can buy Vanguard or Fidelity mutual funds directly through their websites, often with lower fees.

Whichever option you choose, take note of the minimum investment requirements, fees, and fund selections before opening your account.

3. Research and Select a Mutual Fund

Once your investment account is set up, it’s time to research and select a mutual fund. Here's what you should look for when evaluating potential funds:

• Performance History: Review the fund’s performance over different time periods—5 years, 10 years, and since inception. While past performance doesn't guarantee future returns, it provides insight into how the fund has navigated various market conditions.
• Expense Ratios and Fees: Mutual funds charge fees, such as an expense ratio, which covers the cost of managing the fund. Funds with lower expense ratios can improve your long-term returns by minimizing costs. Some funds also charge sales fees (known as loads) when you buy or sell shares. Opt for no-load funds whenever possible to avoid these extra charges.
• Risk Level: Make sure the fund’s risk level aligns with your personal risk tolerance. Stock-based funds (equity funds) tend to carry more risk but offer higher potential returns. Bond funds are usually less risky but offer more modest returns.
• Fund Objective and Strategy: Understand the fund’s investment objectives and strategy. Some funds may focus on growth, others on income, and some may aim for a blend of both. Choose a fund that fits your overall financial plan and goals.

4. Place Your Buy Order

Once you’ve chosen the mutual fund you want to invest in, you’re ready to place a buy order.

Unlike stocks, mutual fund prices are calculated once a day after the market closes, and this price is known as the Net Asset Value (NAV). When you place a buy order, you’ll be purchasing the mutual fund at the next available NAV.

Here are the typical steps to place your buy order:

1. Log into your investment account.
2. Search for the mutual fund by name or ticker symbol.
3. Choose the dollar amount or the number of shares you’d like to purchase.
4. Place your order before the market closes (usually 4:00 PM EST) if you want the transaction to execute at that day's NAV.

Many investors use dollar-cost averaging, where they invest a fixed amount on a regular basis (such as monthly or quarterly). This strategy allows you to invest consistently without worrying about market timing.

Read Next: The Different Types of Mutual Funds and How to Diversify

Visit our Mutual Fund Education Center

How to Sell Mutual Funds

At some point, you may decide to sell mutual fund shares, whether it's to rebalance your portfolio, switch to another investment, or access cash. The process for selling mutual funds is similar to buying, but there are a few additional factors to keep in mind.

1. Determine the Right Time to Sell

Before you sell your mutual fund shares, carefully evaluate your reasons for doing so. It’s important not to react hastily to short-term market fluctuations. Selling during market downturns can lock in losses, so ensure that your decision is based on long-term financial planning.

Some common reasons to sell include:

• Rebalancing your portfolio to maintain your target asset allocation.
• Switching to a fund that better fits your investment goals.
• Needing cash for a major financial event (e.g., buying a home or funding education).

2. Check for Fees and Tax Implications

Before placing a sell order, review your fund’s fee structure. Some mutual funds charge redemption fees for selling shares within a certain time frame (usually within a year or two). If your fund has such a fee, try to hold off on selling until the fee no longer applies.

In addition to fees, be aware of any potential tax consequences:

• Capital Gains Taxes: If your mutual fund has increased in value since you bought it, you may owe capital gains taxes on your profits when you sell. The amount of tax depends on whether you’ve held the fund for over a year (long-term capital gains) or less than a year (short-term capital gains).

If you’re selling from a tax-advantaged account like an IRA or 401(k), you won’t owe taxes immediately, but you may face taxes on withdrawals when you retire.

3. Place Your Sell Order

To sell your mutual fund shares, log into your investment account and follow these steps:

1. Select the mutual fund you want to sell from your account holdings.
2. Choose whether you want to sell a specific dollar amount or a certain number of shares.
3. Submit your sell order. As with buying, the price at which you sell will be based on the fund’s NAV calculated at the end of the trading day.

Keep in mind that the sale may take a few days to settle, depending on the fund. After the sale is complete, you can withdraw the proceeds, reinvest them in another fund, or use the money for other financial needs.

4. Plan for the Future

Once you’ve sold your mutual fund shares, it’s essential to plan how to use the proceeds. You may want to reinvest the money into another mutual fund or diversify into different asset classes such as stocks, bonds, or ETFs.

If your sale was part of a larger rebalancing strategy, ensure your portfolio remains aligned with your long-term financial goals.

Tips for Making Informed Mutual Fund Decisions

Whether you’re buying or selling, there are a few key principles that can help you make better mutual fund decisions:

• Diversify: Spread your investments across different types of mutual funds (such as stocks, bonds, and international funds) to reduce risk and smooth out returns over time.

• Regularly Review Your Portfolio: Monitor your mutual funds periodically to ensure they’re still aligned with your goals. Over time, markets change, and so might your investment needs. Rebalance your portfolio if necessary.

• Avoid Emotional Decisions: Don’t let short-term market fluctuations dictate your buy or sell decisions. Successful investing requires patience and a long-term perspective.

• Consider Professional Help: If you’re unsure about how to choose the right mutual funds or structure your portfolio, consider working with a financial advisor or using a robo-advisor that can provide personalized recommendations.

Final Thoughts

Buying and selling mutual funds is a straightforward process, but it’s essential to approach it with a solid strategy. By setting clear investment goals, thoroughly researching funds, and staying mindful of fees and taxes, you can make informed decisions that help you achieve your financial objectives.

Remember, mutual funds are long-term investments, and staying patient through market ups and downs is key to building wealth over time. Happy investing!