Best Place to Buy a Mutual Fund

BY BRANDON VAGNER, CPA, Ph.D., & WALLET WIT FOUNDER

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Best place to buy a mutual fundA while back, I really started digging into where to buy mutual funds so that I could better ensure financial growth for my family. I knew fees and historical performance were incredibly important, and I wanted to find the best possible places to purchase high quality mutual funds with low fees.

So, where is the best place to buy a mutual fund? To make a long story short, my personal opinion is that through Vanguard directly is quite possibly the best place you can buy a mutual fund. That said, you really should read this entire article. It will make a lot more sense why my wife and I buy mutual funds through Vanguard.

This article is highly useful if you’re looking to setup a Roth IRA or just a simple non-retirement investment account. For both of those, you’ll have to go through an investment company to make your mutual fund purchase. So, the question becomes, where is the best place to buy mutual funds for your Roth IRA or non-retirement investment accounts?

Without a doubt, a mutual fund investment is one of the best investments you can make. Investing in a mutual fund is like investing in hundreds of individual companies all at the same time. Instead of researching individual companies and buying tons and tons of stock one company at a time, you can just simply purchase a mutual fund that is made up of many companies. To a degree, it’s instant diversification, and that’s a big reason why people love mutual funds.

Investing In a Mutual Fund Through Your 401K or 403B

You might be looking to purchase mutual funds through your company or organization sponsored 401K or 403B plan. This article is actually for people trying to figure out where to buy mutual funds outside of a 401K or 403B, but I’ll give you a couple tips anyway on that process and recommend that you read this full article, because you’ll likely want/need to invest in mutual funds outside of your 401K/403B plans.

The first thing you’ll want to do if you’re looking to invest in a mutual fund through a 401K or 403B plan is obtain the plan information and see what products (i.e. what specific mutual funds) are available to you through your program. For example, the organization I work for has pre-selected the mutual funds they want to make available to us as employees. They do this primarily to protect us as their employees. They want to ensure we have strong and stable options to select from.

I always tell people I financially advise that organizations pre-selecting mutual funds is similar to how when you fill your refrigerator at home with food for your family. You know the family is going to go to that refrigerator and eat whatever is in there without reading the labels, and they will do that no matter what you put in there. Therefore, it’s your job to look out for your family and stock it with high quality foods. These companies are doing the exact same thing, except with mutual funds.

All that being said, your options are going to be limited if you’re purchasing through your company program, but here in just a minute I’ll tell you how you can buy other high quality mutual funds outside of your company 401K or 403B program.

If you Google the best historical mutual funds, there is a good chance you won’t find all of them in your company plan. The best thing to do is get the listing of mutual funds that are available to you through your plan and research their historical performance. Some will have a higher historical performance rate than others. You can easily do that research at Yahoo Finance.

How to Invest In a Mutual Fund Through a Roth IRA or Individual Investment Account?

A Roth IRA is incredibly powerful, but many people don’t take advantage of a Roth IRA simply because they don’t know where to get one or what to do. They also get comfortable just investing in their company sponsored 401K or 403B plan and don’t ever take the time to setup a Roth IRA on their own. Allow me to start out by saying, it is incredibly easy for anybody to setup a Roth IRA. It’s not hard at all.

What is the advantage of a Roth IRA over a 401K or 403B?

Your 401K or 403B contributions are made on a pre-tax basis. Meaning, that portion of your monthly pay that gets allocated to your 401K or 403B has not been taxed before being allocated. So, when you go to pull the money out during retirement, you will be taxed at that point when you withdrawal the funds. The big question you must ask yourself is what will your tax rate be when you retire? Will it be higher than it is now or lower? Nobody has a crystal ball and everyone’s situation is different. So, you need to give some thought to that question. It can make a difference in your investment strategy.

Conversely, investing into a Roth IRA is done post-tax. Meaning, you currently receive a paycheck each month with taxes already being withheld. You then take a portion of that money and invest it into a Roth IRA. Since you already paid tax on your income, all of your Roth IRA gains over your lifetime are tax free.

Strategic Mutual Fund Investment Decision

Given the tax implications noted above, it’s advantages for me to first ensure I get my organizational match, but I personally don’t max out my 403B. I only invest what I need to get the match. I then max out my Roth IRA account for the year, which has a maximum per year contribution of $6,000 per person for couples who file married filing jointly. If you’re single, then your maximum contribution per year is $6,000.  If I want to invest more after I’ve maxed out my Roth IRA, I can then go back to my 403B and make additional investments there. If you have a 401K, you can do the exact same thing.

The idea is that I want to ensure I get the “free” money from my organization with their match program, but my second priority is filling my retirement account that will grow tax free, which is the Roth IRA. The goal is to feed at least 15% of your taxable income into these retirement accounts. So, if you invest in your company’s 401K/403B to get their match, then you max out your Roth IRA, and you still have not invested 15% of your taxable income, then you should highly consider going back to your company 401K/403B to invest the rest of what you need to get yourself over that 15% annual threshold. It’s also important to know that the max contribution you can make to your 401K or 403B is $19,000. So, if you’re married, then both of you can contribute up to $19,000 in each of your company plans.

This strategy is exactly what my wife and I do. At my current University, if I contribute 5% of my salary to the 403B plan, then the University contributes an amount equal to roughly 10% of my salary. Yes, I wrote that correctly. 10% of my salary. Not just 10% of my contributions, which some organizations will do.

This is a huge advantage of working for a University. It’s very difficult to get that level of contribution from a company. I have a colleague at a different University that gets 14% of her salary contributed from the University to her retirement. That’s in addition to the 5% she puts in. It’s absolutely incredible!

All that said, you need to find and go through an investment company to actually invest in a Roth IRA. Some of you might not work for a company that offers a 401K or 403B plan. If that is the case, then you’ll definitely need to invest in a Roth IRA, but you might also need to go beyond that and invest in a non-retirement account to reach your 15% annual retirement savings. The company I recommend and use for our Roth IRAs is also an excellent place to invest in mutual funds via a non-retirement account. Yes, you might use the account for retirement purposes, but it won’t be under a tax advantaged umbrella like a Roth IRA or 401K. That’s why I call it a non-retirement account. You might also want a place to park your non-retirement savings, and a non-retirement account through this investment company is a wonderful place to do that as well.

Where to Invest In a Roth IRA?

There are some really important items when it comes to this question, because you’re going to need to go outside of your company to setup a Roth IRA. I know it can be a little scary, because you’re dealing with a lot of money and there isn’t really anybody there to guide you unless you hire a financial advisor. I get it, but once you know where to go, it’s not that scary at all.

Many people will default to a company like Merrill Lynch or Edward Jones to open a Roth IRA account. I’ve actually used both of these companies in the past and think they are great, but I quickly discovered I didn’t have all the mutual fund buying options through companies like these AND the mutual fund fees were sometimes higher than I wanted to pay. Allow me to clarify that they have an incredible suite of mutual fund options for you to chose from, but they didn’t have everything I wanted.

That’s when I discovered it is much more advantageous for me to go directly through the mutual fund provider itself. For example, Vanguard is what I call a mutual fund provider and offers some of the best mutual funds you’ll find. Within your Merrill Lynch or Edward Jones account, you’ll find some of the Vanguard products listed, but typically not all of them.

I originally thought I had to setup a Roth IRA through a company like Merrill Lynch or Edward Jones, but you can actually setup a Roth IRA through Vanguard directly. This is what my wife and I do now, and it’s one of the best decisions I ever made. When you purchase a mutual fund directly through Vanguard, you save a ton on fees with the wonderful options they make available to you. Fees over time are what really have the potential to impact your retirement account growth. Most people don’t think about the difference between 0.35% vs. 0.95% fee rates, but when you run the numbers, it can make a massive difference.

Recall, that I said it’s also important to look at the historical performance of the mutual fund. You’ll find mutual fund options within Vanguard’s direct platform that have incredible performance history. You won’t necessarily find all these options if you’re going through a middle man company. I have many mutual funds that historically have averaged 10% gains and some of those funds are 30+ years old. So, I can see how each of the mutual fund options have historically performed during the ups and downs of the market.

Where to Invest Into a Non-Retirement Account Mutual Fund?

For many different reasons, some people need to invest outside of the retirement accounts we’ve discussed so far. It could be because they have reached the maximum contribution limit; they have exceeded the earnings cap; and/or they don’t work for an organization with a sponsored plan. If you’re wanting to invest in mutual funds outside of a retirement account, I still would advise you to strongly consider Vanguard.

You won’t get the tax advantages like I’ve discussed above, but you still will have the ability to purchase all the amazing Vanguard products.

What Type of Mutual Fund Should I Buy?

Now you know where to go, but what type of mutual fund should you buy? To make it simple, think about it like this. I mentioned before that a mutual fund is made up of hundreds of companies. Companies can be categorized as large/small, domestic/international, etc. Therefore, when a mutual fund provider builds a mutual fund, they select similar companies so you know what type of companies you get with that specific mutual fund. For example, some mutual funds are made up of just large companies. Whereas, other mutual funds contain just small companies. There are different risks associated with both of those types of companies, and it’s a reason why they are grouped together.

There is a large personal finance influencer who advises people to invest evenly across the following four mutual fund categories:

1. Growth
2. Growth and Income
3. Aggressive Growth
4. International

When you access your Vanguard account, you’ll easily be able to identify mutual funds that fall in these categories. You’ll typically have multiple options within each one.

The big take-a-way is that you want to be diversified. In any given year, certain categories might perform better or worse than others, but over time, an even allocation split between these categories should earn you a really good return.

I will say that not every financial expert agrees on allocation percentages among fund categories. Some will agree with the allocation described above, and others would advise differently. A big consideration is how strong you feel US vs. International companies will perform over time. Birth rates is a factor many will look at to make that determination, but just know people have different opinions when it comes to US vs. International. You can do your own investigation and decide if you want to adjust that allocation percentage based on your best guess of future performance of US vs. International mutual funds. I can tell you though that the allocation described above is generally how we have allocated our money.

Final Thoughts

I hope this article has helped clear up some confusion you might have had regarding mutual funds. If it did, please leave me a comment below and let me know.

The biggest thing when it comes to investing is to make sure you’re actually investing. Don’t get paralyzed with all the options available to you. This actually happened to my wife and I when we were younger and just getting started in our careers, but we are consistently investing now and are on a path to financial success over our lifetime.

Discover All That Vanguard Has to Offer

Best of luck to you with your investments! Make sure to come back to the Wallet Wit blog to learn about other saving and money generating topics. My goal with this blog is to help as many people as I can improve their financial position in life and navigate all the curveballs you’re going to be thrown.