How to Buy Mutual Funds Through Your Brokerage Account

You buy mutual funds the same way you buy individual stocks: through a brokerage account, using cash you deposit there

Open a brokerage account with a firm like Fidelity, Schwab, Vanguard, or your bank's investment division. Deposit money into that account. Search for the mutual fund you want by its ticker symbol or name. Click "buy" and enter how many shares you want. The trade settles in one to two business days, and you own the shares.

The main choice you face is not how to buy, but which brokerage to use and which mutual funds to buy. Some brokerages charge trading fees per transaction; others charge none. Some mutual funds charge annual fees (called expense ratios) of 0.05% per year; others charge 1% or more. Over decades, those differences compound.

You can also buy mutual funds through an employer retirement plan like a 401(k) or 403(b), where the plan itself holds the account and you choose from a menu of funds the plan offers. That route skips the brokerage step entirely.

Key Takeaways

• You need a brokerage account to buy mutual funds outside a retirement plan, and most major brokerages charge no trading fees for mutual fund purchases.
• Mutual funds charge annual expense ratios that range from under 0.10% for index funds to 1% or higher for actively managed funds, and this fee comes out of your returns each year.
• You can buy mutual funds through an employer 401(k) or 403(b) without opening a separate brokerage account, though your choices are limited to the plan's menu.
• Mutual funds settle in one to two business days, meaning you own the shares but cannot sell them until settlement is complete.
• Buying mutual funds in a taxable brokerage account triggers capital gains taxes when you sell at a profit, but buying them in an IRA or 401(k) defers or eliminates those taxes.

Opening a brokerage account and depositing money

Start by choosing a brokerage. The major ones—Fidelity, Charles Schwab, Vanguard, E*TRADE, and Interactive Brokers—all allow mutual fund purchases with no trading fees. Your bank may also offer brokerage services. Compare them on whether they charge account maintenance fees (most do not), whether they offer the funds you want to buy, and whether their website or app feels easy to use.

Go to the brokerage's website and click the button to open an account. You will provide your name, address, Social Security number, and employment information. The brokerage will ask what type of account you want: a taxable account (called a "standard" or "individual" account), an IRA, or both. Most people start with a taxable account. The whole process takes 10 to 15 minutes.

Once your account is open, you need to fund it. Link your bank account to the brokerage, then initiate a transfer from your bank to the brokerage. The money usually arrives in one to three business days. Some brokerages let you wire money for faster deposits, but a bank transfer is free.

Finding and buying a specific mutual fund

Log into your brokerage account and look for a "search" or "quote" box. Type the mutual fund's ticker symbol (a four- or five-letter code like VTSAX for Vanguard Total Stock Market Index Fund) or its full name. The fund's page will show its current price per share, its expense ratio, its holdings, and its performance history.

Click "buy" or "trade." Enter the number of shares you want to purchase. The brokerage will show you the total cost (number of shares times the current price). Review it, then confirm the order. The order executes immediately at that day's closing price—mutual funds trade once per day, after the market closes at 4 p.m. Eastern time.

Your shares will settle (officially become yours) in one to two business days. Until then, you own them but cannot sell them. After settlement, you can see them in your account holdings, and you can sell them anytime the market is open.

Understanding mutual fund fees and expense ratios

Every mutual fund charges an annual fee called an expense ratio, expressed as a percentage of your investment. A fund with a 0.05% expense ratio charges $5 per year on a $10,000 investment. A fund with a 1% expense ratio charges $100 on the same $10,000.

Index funds—funds that simply hold all the stocks or bonds in a market index like the S&P 500—typically charge 0.03% to 0.20% per year. Actively managed funds—funds where a manager picks individual stocks or bonds—typically charge 0.50% to 1.50% per year. The fee is deducted automatically from the fund's value each day; you do not pay it separately.

Over 30 years, a 0.05% difference in expense ratio can mean tens of thousands of dollars in lost returns. A $10,000 investment growing at 7% per year costs you about $1,500 more over 30 years if the expense ratio is 1% instead of 0.05%. This is why many investors choose low-cost index funds.

Buying mutual funds through an employer retirement plan

If your employer offers a 401(k), 403(b), or similar plan, you can buy mutual funds directly through that plan without opening a separate brokerage account. You choose how much to contribute from each paycheck, and the plan administrator deducts that amount before taxes and deposits it into your plan account.

Once the money is in your plan account, you log into the plan's website and choose from a menu of mutual funds the plan offers. The plan typically offers 10 to 50 funds, ranging from conservative bond funds to aggressive stock funds. You can usually change your fund choices once per quarter or once per year, depending on the plan.

The advantage is simplicity: the plan handles all the paperwork and deposits. The disadvantage is limited choice—you can only buy the funds the plan offers, not any mutual fund in the market. Many employer plans also charge higher expense ratios than you would pay buying the same funds through a brokerage.

Tax treatment when you buy and sell mutual funds

If you buy a mutual fund in a taxable brokerage account and sell it for more than you paid, you owe capital gains tax on the profit. If you held the fund for more than one year, the tax rate is the long-term capital gains rate (0%, 15%, or 20%, depending on your income). If you held it for one year or less, you pay ordinary income tax rates, which are higher.

If you buy a mutual fund inside an IRA or 401(k), you do not pay capital gains tax when you sell it. In a traditional IRA or 401(k), you pay ordinary income tax on the entire withdrawal when you take the money out in retirement. In a Roth IRA, you pay no tax on withdrawals at all, as long as you follow the withdrawal rules.

This tax difference is why many investors use retirement accounts for mutual funds they plan to trade frequently or hold for decades. Taxable accounts are better for money you may need within a few years.

Choosing between different types of mutual funds

Mutual funds fall into broad categories based on what they hold. Stock funds hold shares of companies and aim for growth over decades. Bond funds hold debt issued by governments and corporations and aim for steady income. Balanced funds hold both stocks and bonds in a fixed mix, like 60% stocks and 40% bonds.

Within each category, you can choose between index funds (which track a market index and charge low fees) and actively managed funds (where a manager picks individual holdings and charges higher fees). Research shows that most actively managed funds do not beat their index fund equivalents over long periods, which is why many investors prefer index funds.

You can also choose based on geography: U.S. stock funds, international stock funds, or a mix. And you can choose based on company size: large-cap funds (big companies), mid-cap funds (medium companies), or small-cap funds (small companies). Most investors start with a simple portfolio of one or two broad index funds and add complexity only if they have a specific reason.

Common mistakes when buying mutual funds

The most common mistake is buying a fund with a high expense ratio without realizing it. Always check the expense ratio before you buy. If two funds hold the same stocks but one charges 0.10% and the other charges 0.80%, the cheaper one will almost certainly give you better returns over time.

Another mistake is buying and selling frequently based on short-term performance. Mutual funds fluctuate in value daily. If you buy a fund and it drops 10% in the next month, that does not mean you made a bad choice—it may mean the market dropped. Selling after a decline locks in the loss. Most investors do better by buying and holding for years.

A third mistake is not diversifying. Buying a single mutual fund that holds 500 different stocks is diversified. Buying five different stock funds that hold mostly the same 500 stocks is not. Before you buy, check what each fund holds to avoid overlap.

Frequently Asked Questions

Do I need a lot of money to start buying mutual funds?

No. Most brokerages have no minimum deposit to open an account. Some mutual funds have minimum initial purchases of $1,000 or $2,500, but many index funds have minimums of $1 or none at all. You can start with whatever amount you have and add to it over time.

Can I buy mutual funds directly from the fund company instead of through a brokerage?

Yes. Vanguard, Fidelity, and Schwab all allow you to buy their own mutual funds directly through their websites without opening a brokerage account. However, if you want to buy funds from multiple companies, a brokerage account is simpler because you can hold everything in one place.

What happens if a mutual fund closes or is merged into another fund?

If a fund closes, the fund company will either liquidate it (sell all holdings and send you cash) or merge it into another fund (automatically convert your shares to the new fund). You will receive notice before this happens. Either way, you may owe capital gains tax on any profit, unless the fund is in a retirement account.

Can I set up automatic purchases of mutual funds?

Yes. Most brokerages allow you to set up automatic monthly or quarterly purchases of a specific mutual fund. This is called dollar-cost averaging and can help you avoid trying to time the market. The brokerage will deduct the amount from your linked bank account on the date you choose.

What is the difference between a mutual fund and an exchange-traded fund (ETF)?

Both hold baskets of stocks or bonds, but they trade differently. Mutual funds trade once per day at the closing price. ETFs trade throughout the day like stocks, and their price changes minute by minute. ETFs often have lower expense ratios than mutual funds. For most long-term investors, the difference is small.