You can buy mutual funds through a brokerage account, a retirement account, or directly from the fund company

The path you take depends on what account type you want to use and whether you already have a brokerage relationship. Most people open a brokerage account at a firm like Fidelity, Schwab, or Vanguard, then search for and purchase funds through that firm's platform. You can also buy directly from a mutual fund company if you want to own only their funds. Retirement accounts like IRAs and 401(k)s also hold mutual funds, though your 401(k) options are limited to what your employer's plan offers.

The actual purchase takes minutes once your account is open and funded. You search for the fund by its ticker symbol or name, decide how much money to invest, and place the order. The fund processes your order at the end of that trading day, and your shares appear in your account the next business day.

Key Takeaways

  • You need a brokerage account, retirement account, or direct relationship with a fund company before you can buy any mutual fund.
  • Opening a brokerage account takes 10 to 20 minutes online and requires basic personal information, proof of identity, and a funding method.
  • Mutual fund orders placed before the market close execute at that day's closing price; orders after the close execute the next trading day.
  • Most brokerages charge no commission to buy mutual funds, though some funds charge internal fees that reduce your returns over time.
  • You can set up automatic monthly investments once your account is open, which removes the need to place an order each time.

Opening a brokerage account at a major firm

A brokerage account is a regular investment account (not a retirement account) where you can buy mutual funds, stocks, bonds, and other investments. The three largest brokerages for individual investors are Fidelity, Charles Schwab, and Vanguard, though many others exist. Each firm's website has an "Open an Account" button that walks you through the process.

You will need your Social Security number, a government-issued ID, your current address, and employment information. You will also choose a funding method — a bank account to transfer money from, a check you mail in, or a wire transfer. Most people link a checking or savings account and transfer money electronically, which takes one to three business days to appear in your brokerage account.

Once your account is funded, you can search for mutual funds by ticker symbol (a four- or five-letter code like VTSAX or FSKAX) or by fund name. The brokerage shows you the fund's expense ratio, holdings, and performance history. You enter the dollar amount you want to invest, review the order, and submit it. The order executes at the fund's closing price that day if you submit before 4 p.m. Eastern time; otherwise it executes the next trading day.

Buying mutual funds through a retirement account

If your employer offers a 401(k) plan, you can invest in mutual funds through payroll deductions. Your employer's plan administrator (often Fidelity, Vanguard, or Schwab, though sometimes a smaller firm) provides a list of available funds. You log into the plan's website, choose which funds to invest in, and decide what percentage of your paycheck goes to each one. The money is deducted before taxes, which reduces your taxable income that year.

An Individual Retirement Account (IRA) works differently. You open an IRA at a brokerage firm just like a regular brokerage account, but with tax advantages. A traditional IRA lets you deduct contributions from your taxes in the year you make them (with income limits if you have a 401(k)). A Roth IRA takes after-tax money but lets your investments grow tax-free. Once your IRA is open and funded, you buy mutual funds the same way you would in a regular brokerage account.

Retirement accounts have annual contribution limits set by the IRS. For 2024, you can contribute up to $7,000 to an IRA (or $8,000 if you are 50 or older) and up to $23,500 to a 401(k) (or $31,000 if you are 50 or older). These limits change each year. You cannot withdraw money from a traditional IRA or 401(k) before age 59½ without paying a 10 percent penalty, though Roth IRAs have different rules.

Buying directly from a mutual fund company

Some investors buy mutual funds directly from the fund company rather than through a brokerage. Vanguard, Fidelity, and T. Rowe Price all allow direct purchases. This approach makes sense if you plan to own only funds from one company and want to avoid having accounts at multiple firms.

The process is similar to opening a brokerage account: you provide personal information, verify your identity, and link a bank account. You then search for the specific fund you want and place an order. The main difference is that you are buying from the fund company itself rather than from an intermediary, which can sometimes mean lower fees, though most major brokerages charge no commission anyway.

One drawback to direct purchase is that you cannot easily diversify across fund families. If you want to own a Vanguard fund, a Fidelity fund, and a T. Rowe Price fund, you would need three separate accounts. A brokerage account lets you hold all three in one place.

Understanding fees and how they affect your returns

Most brokerages charge no commission to buy or sell mutual funds. However, mutual funds themselves charge internal fees called expense ratios, which are deducted from the fund's assets each year. An expense ratio of 0.10 percent means the fund charges $10 per year for every $10,000 you invest. Index funds typically charge 0.03 to 0.20 percent, while actively managed funds often charge 0.50 to 1.50 percent or more.

Over decades, even small differences in fees compound. A fund charging 1.00 percent per year instead of 0.10 percent will cost you tens of thousands of dollars in lost growth on a $100,000 investment. You can see a fund's expense ratio on any brokerage website before you buy. Compare funds with similar holdings to see which one charges less.

Some funds also charge a sales load, which is an upfront fee paid when you buy or sell. Load funds are less common now and are generally not worth buying, since you can find similar funds with no load at any major brokerage.

Setting up automatic monthly investments

Once your account is open, you can set up automatic transfers from your bank account to your brokerage account on a schedule you choose — usually monthly or quarterly. You can then set up automatic purchases of specific mutual funds using that money. This approach, called dollar-cost averaging, removes emotion from investing and ensures you invest consistently regardless of market conditions.

To set this up, log into your brokerage account, find the "Automatic Investments" or "Recurring Orders" section, and enter the fund you want to buy, the dollar amount, and the frequency. The brokerage will execute the order on your chosen date each month. You can change or cancel the automatic investment at any time.

Automatic investing is especially useful for retirement accounts, where you want to invest the same amount regularly and take advantage of tax benefits. It is also a practical way to build wealth without having to remember to place an order each month.

What happens after you place your order

When you submit a mutual fund order before the market closes (4 p.m. Eastern time on a trading day), the fund processes it at that day's closing price. You will see the transaction in your account the next business day, and the shares will be yours to hold. The fund sends you a confirmation statement by email or mail, depending on your account settings.

If you place an order after the market closes or on a weekend or holiday, it executes the next trading day at that day's closing price. This is different from stocks, which trade throughout the day at changing prices. Mutual funds always trade once per day at a single price set at market close.

You can sell your mutual fund shares anytime by logging into your account, selecting the fund, and entering the number of shares or dollar amount you want to sell. The sale executes at the next day's closing price. Money from the sale appears in your account as cash, which you can withdraw to your bank account or reinvest in other funds.

Frequently Asked Questions

Do I need a lot of money to start investing in mutual funds?

No. Most brokerages have no minimum investment requirement, and many mutual funds accept initial investments as low as $1 to $100. Some funds have higher minimums if you buy directly from the company, but buying through a brokerage usually avoids this. You can start with whatever amount you can afford and add to it over time.

Can I lose money investing in mutual funds?

Yes. Mutual fund values go up and down based on the performance of the stocks, bonds, or other investments they hold. If the market declines, your fund value will decline too. However, if you hold the fund for many years and reinvest dividends, historical data shows that stock funds have recovered from past downturns. Bond funds are generally less volatile but offer lower long-term returns.

What is the difference between a mutual fund and an exchange-traded fund (ETF)?

Both hold baskets of stocks or bonds, but they trade differently. Mutual funds trade once per day at closing price, while ETFs trade throughout the day like stocks. ETFs often have lower expense ratios and are more tax-efficient, but mutual funds are simpler for beginners and work well for automatic monthly investing. You can buy either through a brokerage account.

Should I invest in an index fund or an actively managed fund?

Index funds track a market benchmark (like the S&P 500) and charge very low fees. Actively managed funds try to beat the market by picking individual stocks, but they charge higher fees and most do not outperform index funds over long periods. For most investors, a low-cost index fund is the better choice, though some people prefer actively managed funds for specific reasons.

Can I buy mutual funds in a regular brokerage account and a retirement account at the same time?

Yes. Many investors own mutual funds in both a 401(k) or IRA and a regular brokerage account. The retirement account offers tax advantages but has contribution limits and withdrawal restrictions, while the brokerage account has no limits but no tax advantages. You can use both to build wealth toward different goals.