This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Some stock trading platforms offer mutual funds alongside stocks and ETFs, and the mutual funds are available through the same account and the same platform. The availability depends on the broker, and the broker may offer a limited selection of mutual funds, or the broker may offer a wide range. The trader who wants to invest in mutual funds should check the broker's offering, and the trader should compare the cost and the trade-offs.
How mutual funds work on a stock platform
A mutual fund is a pooled investment vehicle, and the mutual fund is managed by a professional manager who invests the pooled money in stocks, bonds, or other assets. The investor buys shares of the mutual fund, and the value of the shares is the net asset value (NAV) of the fund. The NAV is calculated at the end of each trading day, and the NAV is the price at which the investor can buy or sell the shares.
The mutual fund is different from an ETF. An ETF trades on an exchange throughout the day, and the price of the ETF fluctuates with the market. A mutual fund is priced once per day, and the price is the NAV. The mutual fund is also different from a stock. A stock represents a share of a company, and a mutual fund represents a share of a portfolio.
The mutual fund is bought and sold through the broker, and the broker places the order with the fund company. The order is executed at the NAV, and the order is settled within one to three business days. The mutual fund is not traded in real time, and the mutual fund is not subject to intraday volatility.
The availability
Some brokers offer a limited selection of mutual funds, and the selection includes the most popular funds from the major fund families. Other brokers offer a wide selection, and the selection includes thousands of funds from hundreds of fund families. The trader who wants a specific fund should check the broker's offering, and the trader should look for a broker that offers the fund family the trader prefers.
The discount broker typically offers a limited selection, and the discount broker focuses on the no-load funds. The full-service broker typically offers a wide selection, and the full-service broker focuses on the load funds and the advisory funds. The trader should match the broker to the trader's needs.
The cost
The cost of buying a mutual fund on a stock platform includes the expense ratio, the transaction fee, and the load. The expense ratio is the annual fee charged by the fund, and the expense ratio ranges from 0.05 percent for an index fund to 1.5 percent for an actively managed fund. The expense ratio is deducted from the NAV, and the expense ratio is reflected in the return.
The transaction fee is the broker's fee for placing the order, and the transaction fee ranges from €0 to €50 per order. Some brokers waive the transaction fee for no-load funds, and the waiver is an incentive to use the broker for the fund purchases. The transaction fee is a one-time cost, and the transaction fee does not recur unless the trader buys more shares.
The load is a sales charge, and the load is a percentage of the investment. The front-end load is paid when the investor buys the shares, and the front-end load ranges from 0 percent to 5 percent. The back-end load is paid when the investor sells the shares, and the back-end load decreases over time. The no-load fund has no sales charge, and the no-load fund is the most common on discount platforms.
The trade-offs
The first trade-off is the cost. The mutual fund has an expense ratio, and the expense ratio is deducted from the return. The ETF has a similar expense ratio, but the ETF does not have a transaction fee on most brokers. The trader who wants to minimize the cost should consider the ETF instead of the mutual fund, and the trader should compare the total cost.
The second trade-off is the selection. The mutual fund offers access to actively managed strategies, and the actively managed strategies are not available through most ETFs. The trader who wants a specific manager or a specific strategy may have to use a mutual fund, and the trader should compare the strategy with the alternatives.
The third trade-off is the pricing. The mutual fund is priced once per day, and the trader cannot place a limit order. The trader who wants to time the entry has to accept the NAV at the end of the day, and the trader who wants a specific price has to use a different product. The pricing is less flexible than the pricing of an ETF or a stock.
The fourth trade-off is the tax efficiency. The mutual fund is less tax-efficient than the ETF, and the mutual fund may distribute capital gains at the end of the year. The ETF is more tax-efficient because the ETF uses the in-kind creation and redemption mechanism, and the ETF does not trigger capital gains distributions.
Common questions about mutual funds on stock platforms
Can I buy any mutual fund on a stock platform? No, the broker offers a selection, and the selection may not include the fund the trader wants. The trader should check the broker's offering before opening the account, and the trader should look for a broker that offers the fund family the trader prefers.
Is the expense ratio the same across brokers? Yes, the expense ratio is set by the fund, and the expense ratio is the same regardless of the broker. The trader should compare the expense ratios of similar funds, and the trader should pick the fund with the lowest expense ratio for the strategy.
Can I automate the mutual fund purchases? Yes, most brokers offer automatic investment plans, and the automatic investment plan buys a fixed amount of the fund on a regular schedule. The automatic investment plan is useful for dollar-cost averaging, and the automatic investment plan is useful for long-term investors.
Related resources
Where to start
If you are evaluating mutual funds on a stock platform, the most useful first step is to check the broker's selection, the transaction fee, and the available fund families. Our broker comparison lists the brokers and the mutual fund offerings, which together tell you what the broker offers before you open the account.