Understanding mutual funds
Mutual funds are an affordable way to help diversify your portfolio.
On this page:
- What is a mutual fund?
- Why invest in mutual funds?
- What is the difference between active and index mutual funds?
- How do mutual funds and exchange-traded funds (ETFs) compare?
- What fees and costs are associated with mutual funds?
- What types of mutual funds are there?
What is a mutual funds?
Mutual funds let you pool your money with other investors to “mutually” buy stocks, bonds, and other investments.
- They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them.
- You get exposure to all the investments in the fund and any income they generate.
- They offer a wide variety of investment strategies and styles.
Why invest in mutual funds?
Diversification
Mutual funds let you access a wide mix of asset classes, including domestic and international stocks, bonds, and commodities.
Low costs
Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are typically lower than what you would pay as an individual investor.
Convenience
Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are typically lower than what you would pay as an individual investor.
Professional Management
You get the benefit of having a professional manager reviewing and researching the fund’s portfolio on an ongoing basis.
What is the difference between active and index mutual funds?
Actively managed funds
These funds typically strive to beat the market. They’re overseen by portfolio managers who select securities they think will outperform benchmarks. As such, actively managed funds are usually more expensive.
Index funds
These funds, known as index funds, are designed to track—rather than beat—a specific index, such as the S&P 500®. They can be a low-cost way to invest.
How do mutual funds and ETFs compare?
Both mutual funds and exchange-traded funds (ETFs) pool money from many investors and invest that money in securities. Likewise, many investors own a mix of these funds. Before you decide on what’s right for you, there are things to consider.
How they're most similar
Both generally provide broad, diversified exposure to an asset class, region, or a specific market niche, without having to buy lots of individual securities. Will outperform benchmarks. As such, actively managed funds are usually more expensive.
A key difference
Mutual fund trades are executed once a day, at a single price. ETFs are “exchange-traded” and can be bought and sold intraday at different prices.
What fees and costs are associated with mutual funds?
Investing costs can be a key factor in your net return. It’s important to understand how mutual funds assess fees and expenses. These fall into three broad categories:
Operating expense ratio (OER)
OERs cover the fund’s operating expenses and are annually factored into the total return you receive.
Load
A load is a one-time commission some fund companies charge whenever you buy or sell shares in certain load-based mutual funds.
Transaction fee
Brokerage firms may charge a trading fee whenever you buy or sell mutual fund shares.
What types of mutual funds are there?
Common mutual funds
These funds aim to meet the fund’s objectives by investing in traditional assets (equities, fixed income, and/or cash) using traditional strategies (fundamental relative value, indexing, etc.). A large majority of funds fall into this category.
Specialty mutual funds
These funds aim to meet the fund’s objectives through non-traditional investments and trading strategies, such as investing in commodities, or making investments based on environmental or social governance guidelines.
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