Best brokers for mutual funds

Compare mutual fund broker companies

What is a mutual fund?

A mutual fund pools money from several investors to purchase securities like short-term debt, stocks and bonds. The combined investments are the fund's portfolio. When the fund performs well, investors mutually benefit — hence the name. When the fund struggles, everyone feels the effect.

Your risk of losing money is smaller with a mutual fund because it’s a diversified investment vehicle.

There are a few reasons you might want to invest in mutual funds:

Diversification: Investing in a single stock is like putting all your eggs in one basket — a single event that results in stock prices falling could be financially devastating. With a mutual fund, you own shares in several investments. Their cumulative losses and gains balance out to produce your profit. If one (or a few) stock prices fall, your share in the mutual fund may remain stable.

Convenience: Mutual funds can sound complicated, but most make investing easy. All you need to do is buy shares with a brokerage account or directly through the mutual fund company. Many of these funds also have automatic investment plans, which makes things even simpler. For instance, you could automatically invest $500 monthly in the fund, and you won’t even have to think about it.

Your risk of losing money is smaller with a mutual fund because it’s a diversified investment vehicle.

Liquidity: When you decide to invest in mutual funds, you can redeem (sell) your stocks at any time. You'll receive the current net asset value (NAV) minus any applicable fees. Other investment types may be illiquid, meaning it's more difficult (or impossible) to get your money out of the investment before its maturity date. Real estate and some debt instruments are examples of illiquid assets.

Affordability: A mutual fund may have a lower financial barrier to entry than individual stocks. For example, some stocks might cost more than $2,700 per share. But if you choose to invest in a mutual fund with Vanguard that has Autozone stock in its portfolio, you could start with a $1,000 minimum investment.

Professional management: Fund managers select investments in a mutual fund's portfolio. They also decide when to sell specific investments and buy others to produce returns for investors. This can be great for individual investors who don’t have the time or knowledge to research publicly traded companies.

» COMPARE: Mutual funds vs. ETFs

Types of mutual funds

There are four main types of mutual funds. Each type spreads risk across several investments while simultaneously capturing gains from those investments.

There are other types of lesser-known funds, including hedge funds, real estate investment trusts (REITs), socially responsible funds, managed futures and commodities. These specialty or alternative funds fall into a catch-all category.

How to start investing with a broker

Getting started investing with a broker doesn’t have to be complicated. If you know what you want and need in a broker, it should only take a few steps. Here’s how to start investing.

Determine your goals

The first step is to determine your investing goals. As mentioned, starting to invest in mutual funds isn't difficult if you know what you want. However, you shouldn’t skip this step, as it will be foundational to selecting the right investments.

Start by asking yourself why you are investing. For example, are you investing for retirement, a big vacation or a down payment on a car? These are all common reasons to save and invest, but your answer will influence your investing strategy.

Generally, the longer your time horizon, the more ambitious you can be with your investments. This is because they will have time to recover from any downturns that may happen along the way. Conversely, if you need your money in the next few years, you’ll want to be much more conservative.

Open an account with your preferred broker

There are many online brokers, and this page highlights some of the best ones available today. Determine the best broker to meet your needs, then open an account.

First, fill out the online application and submit all the required information.

Note that you typically need to meet basic requirements, like being 18 years old and a U.S. citizen. You may also need to provide relevant information, such as your Social Security number, for tax purposes. The process is usually straightforward and typically takes less than 20 minutes if you meet the requirements.

Research potential investments

Once you have a firm grasp on your investment goals, it’s time to start researching funds that might help you meet those goals. If you’ve already signed up at your broker of choice, many of these companies have mutual fund research tools to make it easy to find the information you need.

When researching mutual funds, a few factors can help you find the best choices:

• Fund mission or theme. One of the most basic things to consider is what the fund aims to do and how it selects its investments. For instance, some funds invest in specific industries, while S&P 500 funds invest in approximately the 500 largest companies by market cap. The fund’s mission should align with your investment goals and needs.
• Past performance. As they say, past performance doesn’t guarantee future performance, but it can give you an idea of whether the fund is meeting its goals. For example, some funds aim to beat a particular stock index. If a fund hasn’t done that for the past several years, it may not be the best choice.
• Fees. Mutual funds can have various fees, such as load fees and expense ratios. Fees tend to be higher for actively managed funds. The average mutual fund expense ratio for equity funds was 0.44% in 2022, according to the Investment Company Institute, so for cost-conscious investors, it’s best to look for funds at or below that number.

Remember to consider more than just the numbers when researching different mutual funds. Consider how the fund aligns with your investment goals and fits into your larger investment strategy.

Many mutual fund brokers are available, from online brokers to full-service human brokers and financial planners. Each may have different fee structures, with some human financial planners charging high fees.

“My advice: look for a fee-only planner who doesn’t earn commissions,” said Jason Weckerly, a certified financial planner at Montgomery Wealth Management.

Robo-advisor vs. online broker

Many fintech companies and, increasingly, established financial institutions offer robo-advisors to help people manage their investments. Robo-advisors use algorithms to manage investment portfolios, using customers’ inputs about their income, risk tolerance and time horizon to build custom portfolios. These platforms offer active management of your investments without human intervention, resulting in lower fees than human investment advisors typically charge.

Robo-advisors are a happy medium between self-directed investing and full-service brokers. While their fees can be lower than a full-service broker might charge, you can achieve even lower fees by investing in index funds in a self-directed investment account. Still, robo-advisors typically charge lower fees than mutual funds.

» MORE: What is a good investment?

What makes a good mutual fund broker?

Choosing a mutual fund broker is not a decision to take lightly, as it will influence everything from available investments to customer service. Some of the main things to consider are the broker's investment selection, fees, and other important features.

One of the most important things to consider is investment selection. Look for brokers that offer a variety of mutual funds, including no-load funds, index funds and actively managed funds. This will give you a wide range of investment choices, allowing your portfolio to change and evolve alongside your investment goals.

Also, take a look at the broker’s research and educational tools. Some brokers offer extensive libraries of educational tools and stock screeners. Knowledge is power – having more information at your fingertips will allow you to make better investment decisions.

Finally, there are other important considerations, such as customer service reputation, user experience, mobile apps and availability of investment advice. Brokers can vary greatly in these areas, with some faring much better than others. Investigate these areas for each broker before signing up.

Mutual fund costs and fees

Many online brokers allow you to open an account with no requirement to deposit a minimum amount. However, to purchase shares in a mutual fund, you often need a minimum investment ranging from $500 to $3,000. A few mutual funds exist with $0 investment minimums. In either case, you can generally contribute as much or as little as you want once you meet the initial investment minimum.

Some of the fees you might have to pay when investing in mutual funds include:

• Expense ratios. This fee is a percentage of your investment and covers the fund's operating expenses, including management fees, administrative costs and marketing. Expense ratios range from 0% to 2% or even more for actively managed funds. The lower the expense ratio, the more money you'll have to reinvest.
• Sales loads. These are upfront fees you pay when you purchase shares in a fund. Typically, these fees range from 2% to 5% of your investment.
• Account maintenance fees. Some brokers charge account or inactivity fees, which are often flat rates. These fees are the same, regardless of which funds or other assets you hold.
• Redemption fees. Brokers sometimes charge fees when you sell shares within a certain period, such as within the first few months of investing. While not all brokers charge these fees, having them on your radar is a good idea.

Depending on the broker, you may pay more or fewer fees. These can enormously impact the funds you receive, so it’s crucial to know what fees you might pay ahead of time.

“Though no-load funds are by far the most widely utilized choice, you’d be surprised at how many clients are brand loyal and pay as much as 5% upfront to buy a loaded fund,” said Weckerly.

Pros and cons of mutual funds