Mutual funds are a product that is too often misunderstood, and as a result, they’re not invested in as much as they should be. Some people might think of mutual fund trading as unethical or illegal, but this couldn’t be further from the truth.
Is mutual fund trading legal?
In reality, it’s perfectly legal for an individual to trade within their accounts on the exchanges where mutual funds are bought and sold. In fact, with most types of managed mutual funds, you can buy them one day and sell them back the next – which is basically the same thing as buying stocks from your broker and then selling them later on. Mutual fund trading isn’t anything new either – it takes place worldwide every day, and it’s a crucial part of building wealth for the everyday person.
The only difference between regular mutual funds and those that are traded is that we’ve invested in many different kinds at once so we can maximise our potential profits and minimise risks. We could buy 5 or 10 different stocks from various companies, but this might be cost-prohibitive because there would likely be transaction fees associated with each purchase. Not to mention that if the stock prices go down after we bought them, it could hurt us. But by buying a mutual fund instead, all of these transactions can happen simultaneously without any extra costs, and as long as the market goes up during your investment, you’ll make money off of your purchase.
What are the risks associated with mutual fund trading?
Trading securities involves additional risks beyond just the absolute risk of losing money that can come with trading stocks or bonds. The tax treatment of short-term capital gains is one issue with trading mutual funds, which we will cover here. As well as how best to manage these, we will explore:
- What a redemption fee is and why you should consider avoiding mutual fund companies who impose them.
- How better-performing funds may not be necessarily better investments.
(i) Mutual fund redemption fees are an additional cost of trading mutual fund shares, where they are charged when you sell or exchange your mutual fund share within a specific time after purchasing it. While the fee will vary by company, it can be as high as 2% of the value of your sale
(ii) Fees affect your bottom line when buying and selling mutual funds because fees are associated with both processes that reduce your returns on capital gains. However, if the fee is too high relative to the amount in question, it makes more sense to purchase no-load funds instead because this fee becomes a more significant proportion of your total investment.
(iii) There is a common misconception that higher-performing funds are better investments. While many consider initial performance as a good predictor of future success, mutual funds with lower costs and fees have been shown to perform better in the long term
(iv) While it can be risky to trade mutual fund shares, there are ways that you can manage these risks. This includes asking yourself if you truly understand what you’re getting into when buying or selling shares; whether you should use limit orders instead of market orders; whether or not dividends make sense for your account; and understanding how these types of investments work (i.e., tax implications).
So next time you’re thinking about investing in a mutual fund, don’t automatically assume it’s “too risky” for you because there’s plenty of ways to protect yourself from sudden downturns or other unexpected events. As a new trader, you can use a demo account from Saxo Bank to practice trading before spending your own money. There are no disadvantages to mutual fund trading, only advantages – so why not find out how good it feels to have a bit more financial flexibility?