Why Invest in Mutual Funds at all?

I was just pondering how to invest some of my cash and a couple mutual funds popped into my head. It dawned on me that I can't think of any reason that someone would invest in a mutual fund unless they haven't found an equivalent ETF.

Lets face it, with Zecco, Bank of America, or Vanguard Flagship free trades you now basically have several methods to trade stocks for free. Even if you only have a few dollars to invest, you can make regular (eg monthly) investment contributions into an ETF for small amounts - even smaller than most mutual fund account contribution minimums.

Basically if you have $25 to you name (or possibly even less), you can make a cost-efficient investment into a ETF (like the Vanguard Total Stock Market ETF) using a no-cost brokerage like Zecco. Kids in middle school can take their allowance and invest it efficiently. That is pretty cool and a big improvement on my 1st investment where the cheapest trading commission I could find was a $40/trade at Olde Discount Brokers.

After we surive the wedding next month, I think my fiancee and I will open a joint brokerage account at Vanguard and take advantage of the recent upgrade to flagship status for free stock trades. We will use this as our primary investment account going forward and make regular monthly investments into one or two ETFs.

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Comments (13)

Greetings-

I have looked into sharebuilder. They have 3 plans. Basic, Standard and Advantage.

Basic: No subscription fee. $4 per trade. $15.95 per trade for real-time.

Standard: Subscription Fee:$12 per Month. 6 trades included and $2 additional for each additional trade. $14.95 per trade for real-time

Advantage: Subscription Fee:$20 per Month.20 trades included. $1 additional for each additional trade. $11.95 per trade for real-time.

Let's take my example: I would like to have automatic investment of $100 per Month.

If I choose the Basic and went with One trade per month, my expenses for a $100 investment is $4. That is 4%. To me it is not a wise choice.

If I choose the Standard, and went with one trade or upto six trades as these are included in the plan, for an investment of $100, my expenses will be 12%. Not wise again.

Advantage, is out of question for me atleast at this point of time.

Zecco: I have read not good stories of Zecco. Here is a link.
http://www.thesunsfinancialdiary.com/investing/stock/first-trading-experience-with-zecco/

Now with that said, what would you recommend for someone like me, who would want to invest $100 per Month and set it up automatic?

Thanks
RV

Posted by RV | September 17, 2007 10:41 AM

If you want an SRI fund, you're still stuck with most mutual fund options... =(

Posted by r | September 17, 2007 6:51 PM

2mil,

Before switching to all ETFs be sure to check the management fees on them. The vanguard ETFs you mention are good choices but there are others out there that have fairly high management fees.

Posted by jeff | September 17, 2007 7:06 PM

ETFs are definitely going to only increase in popularity, but mutual funds are still going to be big in 401ks until self-directed ones finally become popular.

Also, it's much easier to DCA with mutual funds. You can do partial mutual fund shares really easily, and set automatic investments. It's also easier to be fully invested, as opposed to have $100 somewhere in cash that isn't enough to buy 1 entire share.

Personally, I'm sticking with mutual funds for the simplicity... for now.

Posted by Jonathan | September 18, 2007 10:21 AM

RV,
2 ideas:
1) Queue up your $100 monthly contribution on Sharebuilder and make 1 $1200 investment per year. Your investment costs is then just 0.33%. Or maybe find someplace int eh middle to get the best of both worlds.
2) Try Zecco. Not perfect, and I haven't used them yet because I am not convinced they has a sustainable business. However, if you can make 1 free trade a month with not too much hassle it might be worth it. Other PF bloggers have been using Zecco with success so it seems like a viable although not perfect option.

Posted by 2milllion | September 18, 2007 10:24 AM

I think you would like indexing (you are already a vanguard fan, which is like being half way there)... read www.diehards.org for a couple of months

Posted by Eric | September 18, 2007 10:55 AM

To RV, if it is for stocks, see if the company offers a fee free DRIP otherwise you are not a candidate for individual stock purchasing and are better suited for Mutual Funds purchasing where there are no fees.

Posted by wayne | September 18, 2007 2:48 PM

if you work in financial services, you often need preclearance to trade anything, including etfs.

that's why i'm almost exclusively in mutual funds - and troweprice makes it so easy. you can start with just $50.

Posted by brittany | September 19, 2007 11:20 AM

If you go to a etfconnect description (this one is for VTI: http://www.etfconnect.com/select/fundpages/etf_funds.asp?MFID=74637) you will notice that ETF shares trade at a slight premium/discount to NAV. For smaller, less liquid issues like DGG ( http://www.etfconnect.com/select/fundpages/etf_funds.asp?MFID=169167) you will notice that the premium is 2.79% today to NAV. This immediately cancels out any benefit from lower expenses. This is an upfront cost to you and should avoid it.

Therefore be sure to check the premium/discount before you buy any ETF.

A benefit of ETFs that you don't mention is that you can set up GTC limit orders so that you sell your shares when you hit your desired stock price or buy when the shares drop intraday to an attractive level. This is best done within tax-sheltered accounts where there are fewer tax consequences.

Posted by ETFnerd | September 19, 2007 1:48 PM

ETF's are certainly the current trend, but mutual funds still have a purpose. I think most investors are still relatively passive and prefer to know that someone is watching their stock investments.

Posted by Raymond | September 20, 2007 12:40 AM

Greetings All-

Thankyou everyone who has taken the time to answer my questions.

Now, I checked Vanguard. I read about how ETF's are the way to go because of the low expense ratio. Now what about the Commissions that have to be paid to the brokerage services and also the Bid-Ask Spread?

I also checked Traditional Index Funds at Vanguard. The expense ratio's are a little higher than Vanguard ETF's. But from what I am reading these traditional Index Funds also Track Indexes. So is one better than the other?

Cheers
RV

Posted by RV | September 21, 2007 11:01 AM

Great post... I've been researching ETF's for a little while now and the one downside is having to pay brokerage feeds on every purchase - it starts adding up. But I guess with a service like Zecco it eliminates that.... Long as you have the minimum balance. It's just weird putting a lot of money in "zecco" that is so new.

Posted by Bas | October 22, 2007 7:59 PM

Find what you feel comfortable with and start investing. ETF's can be great instruments but like everything else they have to increase in value. What I always adhere to is: always follow the flow of the market. Good luck

Posted by Craig | October 31, 2007 1:44 AM