Mutual Funds:
Buying and Selling of Mutual Funds
You can buy most mutual funds by contacting
the fund companies directly with their 800 number or online. Other funds are
sold through brokers, banks, financial planners, or insurance agents only. If
you buy through a third party there is a good chance they'll hit you with a
sales charge (load).
Companies that sell shares directly to the
public without brokers or sales commissions are typically called direct-marketed
no-load funds. When buying direct from a fund company, there are no transaction
costs. This puts all of your money to work immediately. While most funds are
sold without any sales charges or loads, some charge a low initial fee, usually
1%-3% less and are called low-load funds.
You can invest in a no-load mutual
fund by completing an application and submitting it along with a check
for your investment. At that time, you can also establish an Automatic
Monthly Investment plan, or indicate other services that you are
interested in, such as the ability to invest over the telephone, bank
wire, or online. Once you make an investment, you are a shareholder in
the fund and you'll receive a confirmation of each investment or
redemption you make, along with periodic reports and statements. The fund
will also report dividend payments or capital gains distributions and
provide the tax status of your earnings. You can now open and fund their
mutual fund account electronically and can also opt to receive their
statements and financial documents electronically; cutting down on
paperwork.
More and more funds can be purchased
through no-transaction fee programs that offer funds of many different
companies. These "fund supermarkets" lets you consolidate your holdings
and record keeping, even if you own several funds and still allows you to
buy and sell funds without sales charges from many different companies.
Schwab's OneSource,
Vanguard's FundAccess, and Fidelity's No Transaction Fee Program
called
FundsNetwork are examples of fund supermarkets. Many large brokerages
and discount brokerages such as
Waterhouse securities and
Scottrade have
similar offerings. This method of purchasing mutual funds may work well
for those investors who have the time to do their own research and want
to conveniently purchase funds from several different fund companies in
order to meet their investment goals.
Selling a fund is as easy as purchasing
one. All mutual funds will buy back (redeem) your shares on any business
day.
When should you sell your Mutual Funds?
Deciding when to sell a mutual fund is harder than buying one. That's
because once your money is committed, your emotions come into play,
causing you to hold on to mutual funds that don't fit your financial
goals anymore and to dump losers just before they bounce back. Most
people close out a fund because they need the money or want to change
their investment strategy. However, here are some sell signals that you
should consider:
- Your investment objective changed
- As long as a fund is meeting your objectives, you should hold on to
it. But you shouldn't hesitate to move your money if your investment
goals change. For example, as you get closer to retirement or when
your children are near college age, you should stop taking risks with
your investments. Begin switching some of money from growth stock
funds to short-term bond funds and money market funds. You can't
afford to lose a chunk of it in a last-minute market dip.
- Change in investment style of the
fund -You should also consider switching funds if the fund no
longer meets the criteria or reasons you initially led you to invest
in that fund. For example, if you notice changes in performance,
volatility or fund's investment style.
- Changing of a management - If
a star manager of your fund leaves, you might want to give some time
let new management prove that they can handle the job. But if the new
manager start underperforming the market and it's peers in the same
style for 1 or 2 years, you should consider selling it.
- Fund has grown too large or too
fast - If the funds assets grown too large or too fast, it may be
harder to achieve high returns.
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How do I calculating gains and losses on Mutual funds?
To determine the taxable gain or
loss on mutual fund shares you sell, you first have to determine your
purchase cost, using one of three methods below and then subtracting
from the sale proceeds.
The best choice will often be the
specific identification method, in which you specify exactly
which shares you sold. Tell your broker to sell the shares that cost
you the most, so you can minimize your tax if you made a profit on
it.
If you don't sell specific shares,
it is assume that you sold those shares you bought first know as
first-in,
first-out.
The biggest disadvantage of this is that the shares you
bought first usually have a lowest cost, so selling them results in
the highest tax.
An alternative for some investors is
the average cost or average basis method, which
requires calculating the average per-share price for all your shares
in the fund. Once you've used this method, you always use it for that
fund's shares. |
Next-->>
Reading a mutual fund table and tracking your mutual funds
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