How to Choose the Right Mutual Fund Company (or Companies)

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Dear Money101:

Is it a bad idea to have multiple investments with one company? For example, I like Vanguard, but is it safe to have a 401k, Roth IRA, and one or more mutual funds all with Vanguard? What happens to me if something happens to them? Do I need to spread these things out to other companies like ING, Fidelity, etc.?

Patrick

As with most things in life, there are pros and cons to both sticking with one and spreading out your investments. You need to recognize and then weigh each as they pertain to your own preferences and needs.

First, let’s go over the basics. When you’re investing with Vanguard, you’re not investing “in” Vanguard. The same goes for Fidelity, Oppenheimer, American Century and the others. These companies select expert-level fund managers that make specific investment decisions on a per-fund basis. So you are not taking on any major risk if you stick with just one company.

“A mutual fund company isn’t going to fail,” said Eric Tyson, author of “Mutual Funds for Dummies.”

So, he advised, putting all of your eggs in one basket may not be as dangerous as it may be debilitating.

“Different parent mutual funds have different strengths. If you’re attracted to the convenience of using one mutual fund company you might not be getting the best access to the best funds,” Tyson said.

And just how should you choose the right company or companies for you?

When grading a mutual fund company top focus should be on customer service. You want to be sure that you are taken care of, especially in terms of advice and expertise.

“Whether anything can be 100% ‘safe’ is arguable, but the risk doesn't change according to the account in which the fund is held,” said Ray Russell, author of “An Introduction to Mutual Funds Worldwide.”

“Provided the funds you choose are registered funds and run by respectable/reputable managers with similarly trustworthy depositary and custodian arrangements, then your primary risk is the competence of the fund managers employed by the company,” he said.

An advantage of investing with a big company such as Vanguard is that they have a lot of options.

“In any major company with a brokerage division, you can trade literally thousands of mutual funds through their brokerage services,” said Tyson. “You can access all Vanguard funds but you can also access other funds from the leading mutual funds companies.” You will most likely have to pay a small transaction fee, around $20 or $30 a trade depending on the company, but the access to other funds may be well worth it, he said.

Before investing with a particular company, do some specific research. Look at the one, three, five and ten year return rates to get a clear picture of the fund’s overall performance over time. Also, look at the fees and required minimum investment. Some funds require a minimum investment of $1,000 or more.

“The best analysts would … identify the best managers for the different areas of investment that interest them,” said Russell. “It involves examining historic track records as well as seeking their views on current market situations and opportunities and the resulting strategies they have in mind for their funds.”

Should you decide to put your money in multiple companies, you will not only pay trade fees but you may end up paying additional fees such as comparison costs, said Russell. You may also experience “disadvantages like missing out on discounts available across all your investments if kept with a single provider or the hassle of having to go to several different websites to keep track of your investments.”

Another downside to spreading your money out is keeping tabs on everything.

“If you have accounts at ten different places, you’re at risk for losing track of assets, and that does happen,” said Tyson.

So sticking with one company may appeal to you because it keeps things simple.

“It simplifies your paper work and tax reporting, rather than getting a bunch of statements from companies," said Tyson. “There is less paperwork and, therefore, less of a headache or hassle.”

No matter which you choose, remember to do your homework.

“Any advantage must be weighed against the outcome of careful analysis of both the funds and the fund managers,” said Russell. “Be satisfied you have the best.”

E-mail your questions to Money101@FOXBusiness.com, and let us take off some of the pressure.