The basic steps to invest in a mutual fund

To invest in a mutual fund, you open an account with a brokerage firm or directly with the fund company, choose which fund to buy, and place an order for shares. The brokerage holds your shares and sends you statements showing what you own and how much it is worth. You can buy additional shares whenever you want, and you can sell them back to the fund company at any time during business hours.

The process takes a few days from start to finish. When you place an order, it typically settles within two business days, meaning the money leaves your account and the shares appear in your fund account. You do not need to pick individual stocks or bonds — the fund manager does that work for you, and you own a piece of everything in the fund's portfolio.

Most people invest through one of three routes: a brokerage account (like Fidelity, Vanguard, or Charles Schwab), a workplace retirement plan (like a 401(k) or 403(b)), or directly with a fund company. Each route has different paperwork and different tax treatment, so your choice depends on whether you want to invest money you have already paid taxes on, or money you want to shelter from taxes.

Key Takeaways

  • You can buy mutual fund shares through a brokerage account, directly from a fund company, or through a workplace retirement plan, and each route has different tax consequences.
  • Opening an account requires basic personal information, proof of identity, and a funding method (bank transfer, check, or wire), and the whole process usually takes one to three business days.
  • Mutual funds trade once per day at the end of the trading day, so your order price depends on when the market closes, not when you place your order.
  • You pay fees to the fund company (called the expense ratio) and sometimes to the brokerage (called a transaction fee), and these costs vary widely depending on which fund and which brokerage you choose.
  • Selling shares works the same way as buying: you place an order, it settles in two business days, and the money goes into your brokerage account or bank account.

Opening an account with a brokerage

A brokerage is a company that holds your money and lets you buy and sell investments. The largest brokerages are Fidelity, Vanguard, Charles Schwab, E*TRADE, and TD Ameritrade, though many smaller brokerages exist. You can open an account online in about 15 minutes by providing your name, address, Social Security number, and employment information. The brokerage will ask you to verify your identity — usually by uploading a photo ID or by answering questions about your credit history.

After your account is open, you need to fund it. You can transfer money from your bank account (which usually takes one to three business days), mail a check, or wire money (which is faster but may cost a fee). Some brokerages offer a debit card or checking account linked to your investment account, so you can move money when ready. Once the money is in your account, you can buy mutual fund shares when ready.

Brokerage accounts are taxable, meaning you will owe capital gains tax when you sell shares for a profit, and you will owe tax on any dividends the fund pays out. This is different from a retirement account, where you do not pay tax until you withdraw money years later. If you are investing money you have already paid income tax on, a brokerage account is the right choice.

Buying mutual funds directly from the fund company

Some fund companies, including Vanguard and Fidelity, let you open an account directly with them instead of going through a brokerage. The process is similar: you provide personal information, verify your identity, and fund the account from your bank. The main difference is that you can only buy funds from that one company — you cannot buy a Vanguard fund through a Fidelity direct account, for example.

Direct accounts often have lower fees because you are not paying a brokerage to hold your money. However, you lose flexibility: if you want to own funds from multiple companies, you would need multiple accounts. Most investors use a brokerage instead because it lets them hold funds from many different companies in one place.

Direct accounts work the same way as brokerage accounts for tax purposes. You pay capital gains tax when you sell, and you pay tax on dividends. The account statements and trading rules are identical — the only difference is who is holding your money.

Investing through a workplace retirement plan

If your employer offers a 401(k), 403(b), or similar plan, you can often buy mutual funds through that plan. You enroll through your employer's benefits website or HR department, choose how much to contribute from each paycheck, and select which funds to buy with that money. The money comes out of your paycheck before taxes, so you do not pay federal income tax on it until you withdraw it in retirement.

Workplace plans have strict rules about when you can access your money — generally, you cannot withdraw it without penalty until age 59½. However, the tax savings are substantial: if you contribute $500 per month, you avoid paying income tax on that $500, which could save you $100 to $150 per month depending on your tax bracket. Over time, that adds up significantly.

Most workplace plans offer a limited menu of mutual funds chosen by your employer. You cannot buy any fund you want the way you can through a brokerage. However, the funds available are usually low-cost index funds or diversified funds designed for retirement investing. If your employer matches your contributions (which many do), a workplace plan is almost always the best place to start investing.

Understanding mutual fund pricing and trading

Mutual funds trade once per day, after the stock market closes at 4 p.m. Eastern time. When you place an order to buy or sell, you do not know the exact price you will pay or receive — you only know the price after the market closes. This is different from stocks, which trade throughout the day at prices that change every second.

The price you pay is called the net asset value, or NAV. It is calculated by adding up the value of everything in the fund's portfolio, subtracting the fund's expenses, and dividing by the number of shares outstanding. If a fund owns $100 million in stocks and has 10 million shares, the NAV is $10 per share. When you buy, you pay that NAV plus any sales charge (called a load). When you sell, you receive the NAV minus any redemption fee.

Most mutual funds sold through brokerages are no-load funds, meaning there is no sales charge when you buy or sell. However, you still pay an annual fee called the expense ratio, which is a percentage of your investment that goes to the fund company each year. A fund with a 0.10% expense ratio costs $10 per year on a $10,000 investment. A fund with a 1.0% expense ratio costs $100 per year on the same investment. Over decades, this difference compounds significantly.

Fees and costs you will encounter

Every mutual fund charges an expense ratio, which is the annual cost of running the fund. This fee is automatically deducted from the fund's value each day, so you do not write a check — it just reduces your returns. Expense ratios range from 0.03% (for large index funds at Vanguard or Fidelity) to 1.5% or higher (for actively managed funds or funds sold through financial advisors). The difference between a 0.10% fund and a 1.0% fund is 0.90% per year, which compounds into tens of thousands of dollars over a 30-year investment period.

Some brokerages charge a transaction fee when you buy or sell a mutual fund, typically $5 to $50 per trade. However, most major brokerages (Fidelity, Vanguard, Charles Schwab, E*TRADE) have eliminated transaction fees for most mutual funds. Before opening an account, check the brokerage's website to see which funds are free to trade and which carry a fee.

If you buy a fund through a financial advisor or a bank, you may pay a load, which is a sales commission taken out of your investment. A front-end load is charged when you buy (typically 3% to 6%), and a back-end load is charged when you sell (typically 1% to 6%). Loads are less common now because brokerages offer the same funds without loads, but they still exist in advisor-sold funds and some bank accounts.

How to place your first order

Once your account is funded, buying a mutual fund takes five minutes. Log into your brokerage account, find the "Buy" or "Trade" section, and search for the fund by its ticker symbol (a four-letter code like VTSAX for Vanguard Total Stock Market Index Fund) or by its full name. Enter the number of shares you want to buy or the dollar amount you want to invest, and review the order before submitting.

Your order will show a status of "pending" or "submitted" until the market closes. After 4 p.m. Eastern time, the order will execute at that day's NAV, and your account will show the shares you own. You will receive a confirmation email with the trade details, including the price per share, the total number of shares, and the total amount invested.

Selling works identically: search for the fund, enter the number of shares you want to sell (or choose "sell all"), and submit. The order executes at the next day's NAV, and the money appears in your account two business days later. You can then transfer it to your bank account or use it to buy a different fund.

Frequently Asked Questions

Can I buy mutual funds with a small amount of money?

Yes. Most brokerages have no minimum investment, so you can buy a single share if you want. Some funds have minimums of $1,000 or $3,000 for the first purchase, but this is becoming less common. Check the fund's prospectus or the brokerage's website to see if a minimum applies to the fund you want to buy.

What is the difference between buying a mutual fund and buying an ETF?

ETFs (exchange-traded funds) are similar to mutual funds but trade throughout the day like stocks, so you can buy and sell at any time. Mutual funds trade once per day after the market closes. ETFs often have lower expense ratios and are more tax-efficient, but they require you to pay a brokerage commission if your brokerage charges one. For most investors, the differences are small enough that either choice works well.

Do I have to reinvest dividends, or can I take them as cash?

You can choose either option when you set up your account. Most investors choose to reinvest dividends automatically, which means the fund buys more shares with the dividend money instead of sending it to your bank account. Reinvesting is usually better for long-term investing because it compounds your returns, but you still owe tax on the dividends in a taxable brokerage account.

What happens if the brokerage goes out of business?

Your money is protected by the Securities Investor Protection Corporation (SIPC), which insures up to $500,000 per account at each brokerage. This means if your brokerage fails, SIPC will transfer your shares to another brokerage so you do not lose your investments. SIPC does not protect you against losses if the mutual fund itself performs poorly — it only protects you if the brokerage fails.

Can I set up automatic monthly investments?

Yes. Most brokerages let you set up automatic transfers from your bank account on a specific day each month, and you can direct that money to buy a specific mutual fund. This is called dollar-cost averaging, and it is a common way to invest small amounts regularly without having to remember to place an order each month. Set it up once, and the brokerage handles the rest.