Mutual Funds: Transaction Fee Comparison

Based on our study of 15 online brokerages, the average cost to purchase a mutual fund is $30.00 – an unnecessary cost when an investor can purchase funds without being charged a transaction fee at mutual fund companies. Since the transaction cost and potential tax liability of investing in mutual funds through online brokerages can be very high, we recommend investors looking to invest in mutual funds to purchase them directly from fund companies like Vanguard or Fidelity, through tax-advantaged accounts like IRAs and 401(k)s. If you still want to purchase mutual funds through your online brokerage account, you can minimize your cost by choosing no-transaction fee mutual funds.

Buying Mutual Funds through Online Brokers

A mutual fund is essentially a collection of stocks, bonds or other investments, bundled together. When investors buy a mutual fund, they don’t own the stocks or bonds, instead these investors own shares of the mutual fund. When the bundled investments appreciate or depreciate, the value of shares of the mutual fund also moves accordingly. The bundling of investments increases diversification, which in theory increases risk-adjusted returns.

Transaction Fees & Tax Considerations

If you’re looking to invest in mutual funds, there are two significant factors to consider before purchasing them through an online brokerage: tax considerations and transaction fees. Purchasing mutual funds through a regular (i.e.) taxable brokerage account may generate tax liabilities from capital gain distributions or dividends. For this reason, mutual funds may be more suitable for tax-efficient accounts like IRAs or retirement accounts. 

Since some mutual funds carry transaction fees, multiple purchases over a period of time can quickly add up and eat into your returns. If you still want to purchase mutual funds through your retail brokerage, choose no-transaction fee (NTF) funds offered by the brokerage to minimize costs. However, you should realize that this may limit your mutual fund options. Investors should also be aware that some mutual funds, whether NTF or not NTF, impose a minimum amount requirement.

Average Cost to Purchase Mutual Funds

Based on our study of online brokerages, the average cost to purchase a mutual fund is approximately $30.00. If you plan to purchase a mutual fund, fees could cost you between $9.95 and $76.00 per transaction, depending on the online brokerage. TradeKing and FirstTrade are some of the best online brokers in this regard: they charge the lowest transaction fees at $9.95, while Charles Schwab charges an exorbitant $76.00 for mutual fund purchase. No Transaction Fee (NTF) funds, though they exist, are somewhat limited and don't cost anything to buy.

Brokerage
NTF Availability Mutual Fund Purchase Fee Early Redemption Period (days, less than) Mutual Fund Early Redemption Fee, minimum
TradeKing Yes 9.95 N/A N/A
Firstrade Yes 9.95 180 19.95
Tradestation No 14.95 N/A N/A
Scottrade Yes 17.00 90 17.00
Merrill Edge Yes 19.95 90 39.95
Sharebuilder (CapitalOne) Yes 19.95 90 49.95
e*Trade Yes 19.99 90 49.99
optionshouse No 20.00 N/A N/A
WF WellsTrade Yes 35.00 N/A N/A
T. Rowe Price Yes 35.00 180 50.00
Fidelity Yes 49.95 60 49.95
TD Ameritrade Yes 49.99 180 49.99
TIAA-CREF Self-Directed Brokerage Yes 50.00 90 50.00
Charles Schwab Yes 76.00 90 49.95
SogoTrade No N/A N/A N/A

To minimize costs, we recommend purchasing NTF mutual funds from your brokerage or directly from fund companies like Vanguard and Fidelity. Fund companies generally do not charge transaction fees; Vanguard only charges an operating expense fee as a percentage of your investment, and does not charge a transaction fee for its funds. To avoid triggering tax events, investing through tax-advantaged accounts may be the best way for an investor to hold mutual funds. 

No Transaction Fee Funds

With NTF funds, investors are not charged a transaction fee / commission for the purchase (investors may still be charged an “operating expense” fee, typically as a percentage value of your investment). Online brokerages are typically compensated by fund companies to offer no-transaction fee (NTF) funds. Out of the 15 brokerages we looked at, 12 offered NTF mutual funds. Some full-service investment management companies like Charles Schwab offer their own “house” brand of mutual funds - Schwab includes these funds as part of their NTF mutual funds offering. These are similar in concept to commission-free ETFs (to see which brokers are the best for these, click here).

Online brokerages that offer NTF mutual funds may also charge an early redemption fee when an investor sells the fund within a predefined period after the purchase. The early redemption period varies with different brokerages; for example, FirstTrade charges the early redemption fee if the fund is sold less than 180 days after purchase. TradeKing, on the other hand, does not charge an early redemption fee at all. The average early redemption fee charged by online brokerages is $43.00.

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