Regarding investment choices, it’s pretty safe to say that if you’re like many individuals, you’re looking for investments that can anchor you in safe waters, and at the same, can also make you lots of money. Mutual funds, if chosen carefully, can be a great way to invest and achieve both objectives.
Quick look – Best Mutual Funds
- Best overall: Ally Invest
- Best for low cost: Ally Invest
- Best for beginners: Fidelity Investments
- Best for research: TD Ameritrade
- Best for number of options: Vanguard
- Best for no transaction fees: Charles Schwab
- What's a mutual fund?
- Why might I need a mutual fund?
- Mutual funds vs. individual stocks
- Pros and cons of mutual funds
- How to look for mutual funds
- Which is best?
- Best Overall
- Best for research
- Best for number of options
- Best for beginners
- Best for low cost
- Best for no load, no transaction fees
- Final thoughts
Each investor is different, and you could be looking into a wide variety of tools and resources in a mutual fund broker. Once you know what you’re looking for, the breakdown below can serve as a helpful guide for finding a best-broker match for you based on mutual fund selection, skill level, and financial situation.
What's a mutual fund?
In plain English, a mutual fund is an investment fund that pools money from many investors (including individuals, companies and other organizations) to purchase stocks, bonds and other securities. The reason for this collective approach is that this type of basket of securities (otherwise known as a portfolio) might be tough, if not downright impossible, to recreate on your own.
Just as all the currencies of the world are vastly different from one another, mutual funds can be quite different as well. Here are just a few possible mutual fund characteristics:
- Focused on long-term growth
- Focused on short-term growth
- Invested in stocks
- Invested in bonds
- A mix of both stocks and bonds
Why might I need a mutual fund?
You might be an investor who’s looking for a retirement vehicle, or maybe you’ve identified your goals and you know you want a short-term investment.
Whatever your ultimate goals are, the biggest benefit to a mutual fund is that it’s automatically diversified. In other words, there’s less risk involved because of that giant pool of securities. If things go wrong in one company, other companies in a mutual fund portfolio might still do well, therefore, a mutual fund’s overall net worth, or net asset value, won’t be as negatively affected.
You also might need a mutual fund to achieve specific goals. If you’re planning on retiring at some point in your life, a mutual fund might be worth looking into. If you’ve got a short-term savings goal but can’t risk losing every penny, you might look no further than a mutual fund.
There are so many reasons people choose mutual funds. And to be honest, some just aren’t aware of the differences and invest in the same thing Neighbor Bob invested in last month. (A bad idea, by the way.)
Mutual funds vs. individual stocks
How are mutual funds different than individual stocks?
Mutual funds can be a conglomerate of stocks, and unlike a stock, mutual funds are diversified because you’re investing in a whole bunch of stocks at once. Standalone stocks are a major risk because you’re investing in one versus a whole group of them.
Pros and cons of mutual funds
Besides diversification, there are several other pros for mutual funds. Unfortunately, mutual funds have a few downsides as well.
- They’re professionally managed.
- They’re liquid.
- You can find anything to match what you’re looking for, including risk tolerance and investment horizon.
- Management fees can be high.
- You’re locked in (depending on the type of fund you invest in, you could be locked in for a required amount of time, like five years).
- Operating expense fees can also cause your money to take a hit.
How to look for mutual funds
When it comes to research on individual mutual funds, Morningstar could be your best friend. A ticker symbol-friendly website, Morningstar can help you find new investments (and filter out all the bogus information that exists out there).
However, once you decide which mutual funds you want, you’re going to need a way to purchase them, so you need a broker. This is where a lot of questions arise. “Full-service broker? Online discount broker? Which one is best?”
Which is best?
If you’re trying to decide between a discount or full-service brokerage, there are a few differences–and of course, it depends what you’re looking for. Brokerage accounts allow you to buy and sell stocks, bonds, ETFs and more (mutual funds are included in this list). In contrast, full-service brokers offer more products and services, including planning for retirement, tax advice, and portfolio review. Because services are more comprehensive, typically, fees are a bit higher with full-service brokerages.
If you feel you need more hand-holding, a full-service broker might be what your life is missing. However, if you crave speed and a mutual fund on the cheap, you know you’re better off with a discount broker.
Here are a couple of other things to consider:
- Fees. Fees aren’t the only consideration, but they should be a part of your decision-making process.
- Your goals. Your goals should also be a major consideration in your decision to invest in a mutual fund. What is your time horizon? When will you need your money?
- Load and no-load mutual funds. A loaded mutual fund typically charges a front-end or back-end load or cost, or a percentage of the amount invested, usually one to five percent. It’s a good idea to get a sense of what those fees will entail.
Ally Invest simply can’t be beat for several reasons, even though its selection of mutual funds is smaller than other discount brokers’.
Even though the pool is smaller, there are still about 8,500 mutual funds available to clients. Ally Invest can offer more than 1,600 no load mutual funds and the commission is low compared to its competitors.
In addition, Ally Invest doesn’t charge a short-term redemption fee.
Each investor is different, and you can look into a wide variety of tools and resources through Ally Invest.
Ally Invest fees: Check out the direct link to the website for more information about Ally Invest fees.
Best for research
TD Ameritrade offers a plethora of options for different client needs, and in the research category, TD Ameritrade doesn’t disappoint.
Without excellent research capabilities, it’s not worth trading, and TD Ameritrade understands the requirements well.
Therefore, included in the full TD Ameritrade package are market highlights, analyst reports from industry-recognized third parties (S&P Capital IQ, Dow Jones and Credit Suisse).
NTF mutual funds: No commission
No-load mutual funds: $49.99
Load: No commission
Best for number of options
Vanguard offers over 16,000 mutual funds from leading fund families and NTF funds. Of these funds, Vanguard has you covered across the board when it comes to varying objectives, asset classes and risk exposure. More than 2,000 are no load, no transaction fee (NTF) funds. Expense ratios are well below 0.50%, and some are even below 0.10%.
NTF mutual funds: No commission
No-load mutual funds: $49.99
Load: No commission
Transaction fee: $35 for funds that aren’t NTF mutual funds
Best for beginners
- Retirement investors
- Active traders
- Premium research
- Low fees
- No-transaction-fee mutual funds
Fidelity Investments can offer over 400 analysts and a large research department; you have an automatic network at your fingertips.
According to Fidelity’s website, fund managers look deeply across regions and sectors to find investment opportunities others may miss. That’s why Fidelity is great for those just beginning to venture into investing, and particularly in mutual funds.
The education and hand-holding is there, and immediately to the right on every page is a toll free number and a “chat with a representative” option.
A series of webinars and articles also allow you to learn more about mutual funds. It’s beginner-friendly and also allows you to divide up articles based on your experience level.
Commissions: $49.95 to buy (it’s $75 for some funds, but Fidelity funds are commission-free) $0 to sell ($49.95 if sold within 60 days)
Annual mutual fund low balance fee: $12 per fund
Short-term redemption fee: $49.95 when an NTF fund is sold less than two months after purchase
Best for low cost
Ally Invest is famous for its low costs across the board (not only in the mutual fund category) and you’ll be able to choose from more than 12,000 load and no-load funds through over 500 fund families.
Your goals should also be a major consideration in your decision to invest in a mutual fund with Ally. What is your time horizon? When will you need your money?
Ultimately, regardless of your goals, Ally Invest is a great choice for low cost. Across the board, the broker is well-known in the industry for low expenses.
No load purchases: $9.95
No load sale: $9.95
Load purchases: $0
Load sale: $0
Best for no load, no transaction fees
A no transaction fee mutual fund (NTF) is a mutual fund that doesn’t charge trading fees. Typically, they’re bought directly from the mutual fund company or through a discount brokerage.
Charles Schwab doesn’t have the most robust list of mutual funds at just over 5,000, however, the bulk of these mutual funds are transaction fee-free. The 3,100 funds that have no load or no transaction fees actually make it one of the largest groups of no-load, no-transaction-fee funds among discount brokers. While it’s a hefty price to buy ($76, it’s $0 to sell Schwab’s mutual funds).
Commissions: $76 to buy, $0 to sell
Mutual fund online and automated phone short-term redemption fee: $49.95
Mutual fund broker-assisted short-term redemption fee: $9.95, plus $25 service charge
It’s true that many mutual funds have outperformed the market for long stretches of time. However, if you’re a happy mutual fund customer, you might want to cover your eyes. According to a Standard & Poor’s research report, 92.2% of large cap active funds, 95.4% of mid-cap active funds, and 93.2% of small cap active funds have lagged behind a simple index fund that just tracks the S&P 500.
A big reason for falling short is due to the mutual fund fees and the fact that some mutual funds make short term buying and selling decisions, and thus create more taxable income than a buy-and-hold strategy.