Understanding the Process of Buying Mutual Funds Through a Broker

When it comes to purchasing mutual funds, whether through a broker or directly from a mutual fund company, the process is quite similar. This article will guide you through the step-by-step process, explaining each stage and providing clarity on the differences between a broker and a mutual fund company.

Opening an Account

The first step is to open an account with a broker or a mutual fund company. You can choose a regular brokerage account, an IRA ( Individual Retirement Account), a 529 plan, or any other type of investment account. The primary difference lies in their tax treatment. Each account has two key parts: a "settlement account" in cash or a money market fund, and an actual investment account containing shares of mutual funds or other investments.

Funding the Account

To fund your account, you can simply send money to the brokerage or mutual fund company. Once the funds are received, they are placed into the settlement account, which remains in cash or a money market fund.

Buying Mutual Funds

You can ask the broker or mutual fund company to purchase a mutual fund or other investment by specifying a dollar amount or a specific number of shares. They will buy the requested amount and deposit it into your investment account, using the funds from the settlement account to complete the transaction.

It is important to note that the broker or mutual fund company may have access to the stock exchange through a seat or as a partner, allowing them to buy and sell securities. However, this service may come with a fee, depending on the type of investment and the specific company involved.

Distributing Dividends and Other Income

When the mutual fund pays dividends, some pay monthly, quarterly, or annually, while others may not pay at all. These dividends are typically distributed to the settlement account. You have the option to reinvest the dividends into the same fund at no additional cost, or to leave them in the settlement account in cash.

Withdrawing Funds

When you wish to withdraw money, you can access the cash in the settlement account at any time it contains funds. If you want to sell a portion or all of your investments, including mutual funds, the broker or mutual fund company will sell the investment and deposit the proceeds into the settlement account.

In some cases, the broker or mutual fund company may provide you with a checkbook or credit card that draws from the settlement account, providing access similar to a checking account.

Differences Between a Broker and a Mutual Fund Company

A mutual fund company often offers its own "house" funds that are typically free from fees. On the other hand, a broker usually charges a fee for any investment purchased through them, although they may offer low or no-fee funds as part of a deal. The distinctions between brokers and mutual fund companies have narrowed significantly over time, with modern mutual funds and brokers offering a wide range of investment options and lower fees.

Before deciding on a broker or mutual fund company, it is crucial to research and compare the fees and services offered. Additionally, you should explore the websites of potential brokers or mutual fund companies and determine if they offer online access or physical office locations.

By understanding the details of the buying process and the differences between a broker and a mutual fund company, you can make an informed decision and select the best option for your investment needs.