Mutual funds can makeexcellent additions to your clients' portfolios, yet many people—especially those new to investing—aren't familiar with mutual funds or what they entail.
As a professional, you should be offering information about the benefits of mutual funds and the way in whichthese specific products can help your clients meet their investmentgoals.
Providing the type of information contained in the following tips will help you sell mutual funds to even the most skeptical clients.
Key Takeaways
- A mutual fund's two main selling points are personal customization and diversification.
- Because mutual funds typically handle a large pool of assets, they have access to many more stocks and other funds that an individual investor won't have the capital to buy into.
- One of the main reasons investors steer away from mutual funds is their high expense ratios. A 2-3% ratio is hard to justify when investors can choose broad-based ETFs with expenses as low as 0.1%.
- When selling mutual funds, focus on the total return of investment versus the mitigation of risk.
- Professional portfolio management of mutual funds may appeal to clients who aren't DIYers.
Automatic Diversification
The first benefit of mutual funds that you should emphasize is the incredible diversification they offer. Explain how diversification helps your clients avoid catastrophic losses and protects portfolios during economic turmoil by spreading out the total investmentover several different types of assets in different industries.
Diversification Without the Cost
To create optimally diversified portfolios on their own, your clients would need to invest in a wide range of securities from different sectors. A sufficiently diversified, self-managed portfolio requires an immenseinvestmentof research time and capital.
Even with your help in selecting profitable assets, your clients would be looking at considerable costs in the form oftrading commissions and transactionfees.
A mutual fund offers shareholders automatic diversification, either across industries or within a single sector. Mutual funds also allow your clients to pick a mixture of high-risk, high-reward securities and stable growth assets to spread their risk and benefit from both investment types.
Diversification in Foreign Assets
Mutual fundscan be a great way to get diversified exposure to just about anyasset class. For instance, many international markets, especially the emerging ones, can be difficult to invest in directly. Surprisingly, many European markets are not highly liquid or investor friendly.
In such cases, it pays to have a professional manager on your side, wadingthrough allthe complexities. A mutual fundcan specialize in smaller marketsand offer investment expertise. That can make paying an active manager's fee worth it.
Mutual Funds for Customization
Besides diversification, the greatest advantage of mutual funds is their virtually endless variety. This wide assortment of products makes it relatively simple to find funds that fit your clients' needs.
As you discuss the benefits of mutual funds with your clients, ask about specific investment goals and assess your clients' risk tolerances. A clear understanding of these two factors will help determine which funds you recommend and can mean the difference between successful investments and very dissatisfied clients.
If your clients want to preserve their initial investments and are comfortable with modest fixed rates of return, point them toward money market funds or bond funds that invest in highly rated long-term debt.
Mutual Funds for Desired Income
Mutual funds generate two kinds of income: capital gains and dividends. Though any net profits generated by a fund must be passed on to shareholders at least once a year, the frequency with which different funds make distributions varies widely.
If your client is looking to grow their wealth over the long-term and is not concerned with generating immediate income, funds that focus on growth stocks and use a buy-and-hold strategy are best. They generally incur lower expenses and have a lower tax impact than other types of funds.
If regular investment income is your client'smain goal, you should discuss the benefits of dividend funds that invest in dividend-bearing stocks and interest-bearing bonds. Explain that a variety of funds can offer consistent annual income from different sources, depending on your clients' risk tolerance.
If they are primarily focused on making big gains quickly, talk about stock funds that might offer the best chance of speedy profits. However, be sure to discuss the increased risk of loss that accompanies aggressively managed high-yield funds. Help your clients understand that sky-high profits come with a price.
Access to High-Value Assets
Mutual funds pool the investments of thousands of shareholders, so they can invest in stocks, bonds, and other securities that may be well out of the price range of your clients if they invested in them individually.
This pooling allows your clients to benefit from the growth and dividend payments of big-ticket assets, such as The Coca-Cola Company, Alphabet, and Costco Wholesale Corporation, without requiring the massive amounts of capital necessary to purchase any substantial holding in either company.
Affordability and Liquidity
Mutual funds are far more affordable for the average investor than the assets in which the mutual funds invest. Do the math, and show your clients how mutual funds allow them to invest in the same assets as Warren Buffet without having his net worth.
Explain how open-ended funds work. Open-ended funds will allow your clients to liquidate their holdings at any time, giving them easy access to those dollars when they need them.
In addition, many funds allow your clients to set up redemption schedules, so they can liquidate part of their holdings on specified days each month, quarter, or year, ensuringregular investment income.
Professional Management
Mutual funds are managed by professionals whose entire careers revolve around turning profits for shareholders. While your role is still to help your clients choose the right assets, investing in a mutual fundrecruits a seasoned generalto your clients' investment armies. You help your clients select the mutual funds that best suit their needs, and the fund manager ensures that your recommendation pays off.
Mutual Funds for Effortless Returns
The benefit of professional management ties right in with the next advantage of mutual funds—effortless returns. Initially, of course, there is some legwork that goes into selecting the right fund.
After making the investment, your clients can essentially sit back and watch their returns roll in, knowing that the fund managers are working to keep the funds profitable. Until they are ready to sell their shares, there is little for you and your clients to do except monitor the funds' performances and net profits.
If your clients are inclined to self-manage their portfolios, you might point out the amount of research and daily involvement that would be required to manage such a wide range of assets on their own.
Mutual Funds and Tax Strategy
When assessing the suitability of mutual funds, it is important to consider taxes. Depending on an investor'scurrent financial situation, income from mutual funds can have aserious impacton theirannual tax liability. The more income they earn in a given year, the higher their ordinary income and capital gains tax brackets.
Dividend-bearing funds are a poor choice for those looking to minimize their tax liability. Though funds that employ a long-term investment strategy may pay qualified dividends which are taxed at the lower capital gains rate, any dividend payments increase an investor's taxable income for the year.
The best choice is to direct them to funds that focus on long-term capital gains and avoid dividend stocks or interest-bearing corporate bonds. Funds that invest in tax-free government or municipal bonds generate interest that is not subject to federal income tax, and these may be a good choice. Still, not all tax-free bonds are completely tax-free, so make sure to check whether those earnings are subject to state or local taxes.
Many funds offer products managed with the specific goal of tax-efficiency. These funds employ a buy-and-hold strategy and eschew dividend- or interest-paying securities. They come in a variety of forms, so it's important to consider risk tolerance and investment goals when looking at atax-efficientfund.
Mutual Fund Downside
Even if you do not have a fiduciary duty to your clients, you should act as if you did. Be honest with your clients about some of the less-attractive aspects of mutual funds, so that they are fully informed whenmakingtheir decision. Chief among these disadvantages are the potential for increased taxes and annual expenses.
Fee Disadvantages
Since you should already have a clear idea of what types of funds fit your clients' needs, talk to them about the typical expenses incurred by those types of investments. For example, if they are looking for high-yield funds with active fund managers, explain that the increased trading activity will likely mean higher expense ratios.
Tax Disadvantages
Discuss the tax implications of their investment choices. While any type of investment will impact your clients' tax liability to some degree, it's important to outline the specific effects of the types of funds they're considering.
If they are looking into dividend funds, say, you coulddiscuss the taxation of dividend income, and how investing in funds that employ a buy-and-hold strategy can reduce tax liability by paying qualified dividends that are taxed at the capital gains rate rather than as ordinary income.
Put Your Client First
Avoid recommending products based on the promise of commissions or other advantages. Always direct your clients to the products that are best-suited to their specific needs, regardless of which firm offers them.
Know When to Say No
Being a financial advisor requires a delicate balance of ambition and realism. While mutual funds are a great fit for a broad spectrum of investors, you should heed the signs that this type of investment may not be well-suited to your clients' investment style.
If your clients enjoy playing an active rolein how and when their money is invested, mutual funds may not be for them. While the professional management of mutual funds is a huge advantage, it also removes investors from the day-to-day mechanics of security and market analysis and trading. Be sure your clients are comfortable entrusting their investments to someone else, thus forfeitingcontrol over asset allocation and trading strategy.
In addition, mutual funds may not be the best choice for clients who are primarily concerned with annual expenses. Unlike taking positions in individual stocks or bonds, becoming aninvestor—in other words, a shareholder—in a mutual fundpresupposes paying annual fees equal to a percentage of the value of one's investment. This means any mutual fund needs to generate annual returns greater than its expense ratio in order for shareholders to profit.
High-yield funds require a very activemanagement style, which can mean expense ratios of 2%-3% in order to compensate for the fees generated by frequent trading of assets.
More passively managed portfolios may have much lowerexpense ratios, but theseoften correspondto lower returns, as these funds are primarily oriented toward long-term growth rather thanthe highest yields possible.
FAQs
Redemption of Units - online
You simply have to log-on to the 'Online Transaction' page of the desired Mutual Fund and log-in using your Folio Number and/or the PAN, select the Scheme and the number of units (or the amount) you wish to redeem and confirm your transaction.
How do you sell mutual funds to customers? ›
Providing the information in these tips will help you sell mutual funds to even the most skeptical of clients.
- Desired Income Investment Funds. ...
- Access to high-value assets. ...
- Affordability and liquidity. ...
- Professional management. ...
- Co-financing for easy return. ...
- Investment funds and tax strategy. ...
- Disadvantages of Fee.
Redemption of Units - online
You simply have to log-on to the 'Online Transaction' page of the desired Mutual Fund and log-in using your Folio Number and/or the PAN, select the Scheme and the number of units (or the amount) you wish to redeem and confirm your transaction.
What is the best way to sell mutual funds? ›
Mutual fund shares are sold the same way that they're bought: either through the fund company directly or through your broker. You'll receive the next available net asset value as your price for each share sold. You'll also have to pay any applicable fees or charges.
How do I sell my mutual funds to avoid taxes? ›
Hold Funds in a Retirement Account
This means you can sell shares of your mutual fund or collect a capital gains distribution without paying the relevant taxes so long as you keep the money in that retirement account. You will ultimately owe any related taxes once you withdraw the money, of course.
Do I have to pay taxes if I sell my mutual funds? ›
Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain." But you may also owe taxes if the fund realizes a gain by selling a security for more than the original purchase price—even if you haven't sold any shares.
Is it hard to sell mutual funds? ›
When an investor sells mutual fund shares, the redemption process is straightforward, but there might be unexpected charges or fees. Class A shares usually have front-end sales loads, which are fees charged when the investment is made, but Class B shares may impose a charge when shares are sold.
How quickly can you sell a mutual fund? ›
But for mutual funds, the timing is different. Mutual fund trades typically settle the next business day, or T+1. So it's possible you could get your money as soon as the day after you sell.
How do brokers make money selling mutual funds? ›
Brokers are paid commissions based on the products they sell and are oftentimes incentivized to sell certain products over others. When you purchase a mutual fund with a sales load, part of that additional expense is used by the mutual fund company to pay a commission to the advisor.
How do you convince a client to invest? ›
Top ten tips for convincing investors
- Help your investor like you.
- Make your investors feel comfortable during your pitch.
- Understand that logic alone will not convince investors.
- Convince by giving your investor a simple investment story.
- Speak to your investor using their language.
In the United States, this is usually between 4 pm and 6 pm EST. This lag allows short-term traders to profit from swings in the stock market before they are reflected in mutual fund NAVs.
What is the 30 day rule on mutual funds? ›
The wash-sale rule states that, if an investment is sold at a loss and then repurchased within 30 days, the initial loss cannot be claimed for tax purposes. So, just wait for 30 days after the sale date before repurchasing the same or similar investment.
How to sell Vanguard mutual fund? ›
To sell a mutual fund from your Account overview page, first select the Holdings tab. From the Holdings tab, find the Transact dropdown menu. Select Sell Vanguard funds to begin your order.
How much tax do I pay on selling mutual fund withdrawals? ›
As you can see, most filers will pay either 0% or 15% in capital gains tax when selling a mutual fund. But it is possible, your income will warrant a 20% capital gain. In any case, long-term capital gains taxes are typically less of a tax burden than paying ordinary income tax.
Are mutual funds taxed twice? ›
You'll owe tax on two levels if a stock holding in your mutual fund pays dividends, then the fund manager later sells the stock at a higher value than they paid for it: A dividend tax, which is generally applied at your income tax rate. A capital gains tax, which will be taxed at capital gains rates.
When not to sell mutual funds? ›
Consistent Underperformance
If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations.
How much is capital gains tax when selling mutual funds? ›
Under current IRS regulations, capital gains distributions from mutual fund or ETF holdings are taxed as long-term capital gains, no matter how long the individual has owned shares of the fund. 1 That means a tax rate of 0%, 15%, or 20%, depending on the individual's ordinary income tax rate.
Is there a penalty for cashing out a mutual fund? ›
You can generally withdraw money from a mutual fund at any time without penalty. However, if the mutual fund is held in a tax-advantaged account like an IRA, you may face early withdrawal penalties, depending on the type of account and how the mutual fund has performed.
Do you pay capital gains on mutual funds before selling? ›
You must pay taxes on dividends, interest, and capital gains that the fund company distributes to you, in addition to capital gains on sale or exchange of shares in your account.
Can I sell a mutual fund to avoid capital gains? ›
This means you can sell shares of your mutual fund or collect a capital gains distribution without paying the relevant taxes so long as you keep the money in that retirement account. You will ultimately owe any related taxes once you withdraw the money, of course.
Yes, you can redeem your mutual fund investments any time you want.
How do you close a mutual fund? ›
You must reach out to the Asset Management Company managing the mutual fund in which you have made the investments and inform them that you are interested in cancelling the SIP. Post that, collect the Appointment Form from the AMC's office or the Registrar and Transfer agents.
When should I sell my mutual fund profit? ›
You may want to sell a mutual fund if it is massively outperforming its benchmark. Other reasons to sell include "style drift," you need to rebalance your portfolio or your risk tolerance has changed. The final reason to sell mutual funds is if there are cheaper options available.
Is a 1% management fee high? ›
Many financial advisers charge based on how much money they manage on your behalf, and 1% of your total assets under management is a pretty standard fee. But psst: If you have over $1 million, a flat fee might make a lot more financial sense for you, pros say.
Do I need a broker for mutual funds? ›
One may invest in mutual funds DIRECTLY i.e., without involving or routing the investment through any distributor/agent in a 'Direct Plan'. OR one may choose to invest in mutual funds with the help of a Mutual Fund distributor/agent in what is termed as a 'Regular Plan'.
What is a typical broker fee? ›
Realtors and real estate brokers typically charge around 5% to 6% of the selling price of a house. 2 This is often split between the seller's agent and the buyer's agent.
How can I tell my client that I need money? ›
Asking for payment from clients over the phone
- Make sure you're talking to the right person.
- Introduce yourself.
- Have a good idea of what you want.
- Get straight to the point.
- Speak calmly and clearly.
- Do not let the emotions get the better of you.
- Summarize everything at the end of the call.
How to ask someone to pay you for work
- Avoid letting too much time pass from the payment due date. ...
- Set up an emailing schedule. ...
- Send polite reminders before the due date. ...
- Send a polite but direct email on the due date. ...
- Firmly remind them when your invoice is overdue. ...
- Call them if they still don't pay you.
Fifteen experts from Forbes Coaches Council offer their best techniques for gently encouraging clients to pick you.
- Listen And Clarify Their Desires. ...
- Demonstrate Your Expertise. ...
- Don't Sell Services, Sell Solutions. ...
- Fix Your Value Proposition First. ...
- Focus On The Customer. ...
- Reward Them For Action. ...
- Build Trust In Your Answers.
A new analysis from Bespoke Investment Group finds that Fridays have been the best day so far this week, with an average daily gain of +0.34%. Tuesdays, on average, were the worst.
How often mutual funds trade. Unlike stocks, which can be sold at any time during regular market hours, mutual funds trade only once per day after the markets close at 4 p.m. Eastern Time.
Which day of month is best for mutual fund? ›
There is no specific date of the month that gives better SIP returns. So, your own convenience should be the only determining criterion. For example, if you are a salaried person and receive your monthly pay at the end of the month, then you can plan your SIP in the first week of the following month.
What is the 90% rule for mutual funds? ›
The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital towards low-cost stock-based index funds and the remainder 10% to short-term government bonds.
What is the golden rule of mutual fund? ›
The investment must be made systematically over a long period. It helps in 'rupee cost averaging', bringing down your average cost of holding due to market volatility. Keep long-term in mind while investing through mutual funds.
What is the 80% rule for mutual funds? ›
In general, to comply with the rule, an investment company with a name that suggests that the company focuses on a particular type of investment will either have to adopt a fundamental policy to invest at least 80% of its assets in the type of investment suggested by its name or adopt a policy of notifying its ...
Which is better Vanguard or Fidelity? ›
In fact, Fidelity is our overall pick for the best online broker in 2022, so it is very hard to beat. All that said, Vanguard still offers some of the lowest-cost funds in the industry and will appeal to buy-and-hold investors, retirement savers, and investors who want access to professional advice.
How long does it take Vanguard to sell mutual funds? ›
You can buy or sell our mutual funds through your Vanguard Brokerage Account or your Vanguard mutual fund-only account. If you buy or sell via a bank transfer, your bank account should be debited or credited within 2 business days.
How much does Vanguard charge to withdraw money? ›
Vanguard charges $0 for withdrawal. The withdrawal process is usually executed within 2 days. Vanguard is a reliable broker, regulated by at least one top-tier regulator. You can only withdraw funds to accounts in your name.
Is it better to sell a mutual fund before or after a distribution? ›
If you sell before the fund's ex-dividend date, you won't receive the upcoming dividend distribution, and your entire profit will be a lower-taxed long-term capital gain, as long as you've held the shares for more than a year.
Why can't I withdraw money from Vanguard? ›
When you sell funds you'll need to wait for the trade to settle before you can withdraw the cash. This normally happens 2 business days after the trade completes.
These capital gain distributions are usually paid to you or credited to your mutual fund account, and are considered income to you. Form 1099-DIV, Dividends and Distributions distinguishes capital gain distributions from other types of income, such as ordinary dividends.
Do I need to report mutual funds on taxes? ›
For any time during the year you bought or sold shares in a mutual fund, you must report the transaction on your tax return and pay tax on any gains and dividends.
How much tax do you pay on mutual funds after 1 year? ›
You make long-term capital gains on selling your equity fund units after holding them for over one year. These capital gains of up to Rs 1 lakh a year are tax-exempt. Any long-term capital gains exceeding this limit attracts LTCG tax at 10%, without indexation benefit.
Do I have to pay taxes on my Vanguard account? ›
In many cases, you won't owe taxes on earnings until you take the money out of the account—or, depending on the type of account, ever. But for general investing accounts, taxes are due at the time you earn the money. The tax rate you pay on your investment income depends on how you earn the money.
How does it work when you sell a mutual fund? ›
Selling mutual fund shares
Mutual fund shares are sold the same way that they're bought: either through the fund company directly or through your broker. You'll receive the next available net asset value as your price for each share sold. You'll also have to pay any applicable fees or charges.
What happens to mutual funds if the market crashes? ›
When the markets are in a slump, your entire corpus will be affected. So instead of a lump sum, an investor should consider investing through an STP (systematic transfer plan). In this, you invest your lump sum in a debt fund and it gets transferred to an equity fund in SIP mode.
How are mutual funds bought and sold? ›
How to buy and sell mutual funds. Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund's per share net asset value plus any fees charged at the time of purchase, such as sales loads.
How do you distribute money in mutual funds? ›
Income distribution from a mutual fund to its shareholders can take two forms:
- A shareholder can elect to be paid directly, which puts the money in their pocket.
- The shareholder can elect to buy more shares of the fund, which means that they are reinvesting the amount of the dividend in more shares.
Basics of mutual fund trading
When you buy or redeem a mutual fund, you are transacting directly with the fund, whereas with ETFs and stocks, you are trading on the secondary market. Unlike stocks and ETFs, mutual funds trade only once per day, after the markets close at 4 p.m. ET.
How long does it take to sell a mutual fund? ›
Mutual fund trades typically settle the next business day, or T+1. So it's possible you could get your money as soon as the day after you sell.
How often mutual funds trade. Unlike stocks, which can be sold at any time during regular market hours, mutual funds trade only once per day after the markets close at 4 p.m. Eastern Time.
Can mutual funds be converted to cash? ›
If you own fractional shares of the mutual fund, they may be redeemed and converted to cash by the mutual fund before the conversion. This redemption may be treated as a taxable event, and you might owe taxes when you redeem. Taxes.
What are 3 ways to make money with mutual funds? ›
When you invest in mutual funds, you make money in one of three ways: Dividends, Capital gains, and Net Asset Value (NAV).
- Dividends. A dividend is a money paid regularly (typically annually) to shareholders for their investment in a company's equity. ...
- Capital Gains. ...
- Net Asset Value.
Distributions are allocated to unitholders in proportion to the number of units they hold on a specific date, known as the “record date”. Example: If you held 100 mutual fund units on the record date, and the distribution was $0.50 per unit, you would receive a taxable distribution of $50.
What is a typical mutual fund sales charge? ›
By regulation, the maximum permitted sales charge is 8.5%, but most loads fall within a 3% to 6% range. The level of sales charge an investor incurs often depends on the specific share classes of a fund.
How quickly do mutual fund sales settle? ›
The two-day settlement date applies to most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. Government securities and stock options settle on the next business day following the trade.
How much do you make selling mutual funds? ›
Mutual funds: Typically, advisors making commissions on mutual funds get paid via a trailer fee. This commission can range from 0.25% to 1% of the assets invested in the fund on an annual basis. The advisor may receive this fee as long as the investment remains in the mutual fund.
How long should I hold mutual funds? ›
The Short Term Capital Gains (STCG) tax is higher than the Long Term Capital Gains (LTCG) tax and so it would be wise to stay till the completion of the short term capital gains period. The period till which STCG is applicable is 3 years for all debt funds, fund of funds and international equity funds.
How do you earn monthly income from mutual funds? ›
Through SWP, you can withdraw a fixed amount on a monthly or quarterly basis from the investment you have made in any mutual fund scheme. You can choose a day of the month or quarter when a withdrawal can be made and the amount credited to your bank account by the fund house.
