What Are Mutual Funds?

A mutual fund gathers money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. For millions of Americans, these funds are the cornerstone of their retirement savings, offering professional management and built-in diversification that would be difficult to achi𒐪eve on their own.

In a mutual fund, investors pool their money to buy assets together, benefiting from shared costs and professional expertise. Rather than buying individual stocks or bonds, you buy shares in the fund itself, becom🍎ing partial owners of all its holඣdings.

Whenಞ you invest in a mutual fund, you’re essentially hiring professional money managers to make investment decisions on your behalf. These managers research opportunities, select securities, and monitor performance according to the fund’s stated objectives—whether that’s aggressive growth, steady income, or matching a market index.🌌

How Mutual Funds Work

Mutual funds are portfolios of investments funded by all those who have bought shares in the fund. When someone buys shares in a mutual fund, they gain part-ownership of all of the funওd’s underlying assets. The fund’s performance depends on its assets—if it’s full of stocks going up, it will go up. If they’re going down, so will the fund.

While a mutual fund manager oversees the portfolio, deciding how to divide money across sectors, industries, companies, etc., based on the fund’s strategy, many mutual funds are so-called index or 澳洲幸运5官方开奖结果体彩网:passive funds, with portfolios that shouldn’t need too much management. They simply mirror the assets of indexes like the S&P 500 or the Dow Jones Industrial Average.

The biggest fund managers are 澳洲幸运5官方开奖结果体彩网:Vanguard and Fidelity.

The number of American households invested in mutual funds has increased significantly since they were introduced about half a century ago, from about 6% of households in 1980 to about 53% in the mid-2020s, including about 35% of Gen Z households. Together, American households own about 88% of all mutual fund assets.

Mutual funds give everyday investors access to a diverse investment menu they likely couldn’t build on their own. Rather than putting all your money into one stock or bond—which can be risky—a mutual fund spreads your investments across many different securities.

How to Invest in Mutual Funds

Investing in mutual funds is re💟latively straightforward, involving the following steps:

1. Before buying shares, you should check with your employer to see if they offer mutual funds through your 401(k) or other retirement funds, since these might have matching funds—essentially doubling what you put in.
2. Once you know you won’t be investing in mutual funds through work, make sure you have a brokerage account with enough deposited to buy the mutual fund shares you want.
3. Identify mutual funds that match your investing goals regarding risk, returns, fees, and minimum investments. Many platforms offer fund screening tools.
4. Determine how much you want to invest and submit your trade. To increase your investment over time, you can often set up automatic periodic purchases of shares.
5. While these investments are often long-term, you should periodically check the fund’s performance and adjust as needed.
6. When it’s time to close your position, enter a sell order on your platform.

Types of Mutual Funds

There are many types among the more than 8,800 mutual funds in the United States, with most in four main categories: stock, money market, bond, and target-date funds.

Target-date Funds: The "Set-It-and-Forget-It" Approach

澳洲幸运5官方开奖结果体彩网:Target-date funds offer a straightforward approach to ret🍬irement investing by automatically adjusting their mix of stocks, bonds, and other assets based on when you plan to retire. These mutual funds, which often have years like “2045” or “2050” in their names, start with aggressive growth strategies and gradually become more conservative as you approach retirement.

These funds require 澳洲幸运5官方开奖结果体彩网:active management—but not from you. Earlier in your career, the fund might invest 90% of your money ♉in stocks for growth potential. As you near ret💎irement, it shifts more money into bonds and cash to help protect your nest egg from market swings.

For example, a 30-year-old planning to retire in 2065 might choose a “2065 Target Date Fund.” Initially, this fund would primarily hold stocks.♒ Over time, it automatically rebalances to include more conservative investments, cutting down on risk when you can le🗹ast afford major losses.

However, target-date funds aren’t one-size-fits-all. Their fees can vary significantly, and their investment strategies—known as 澳洲幸运5官方开奖结果体彩网:glide paths—differ among fund companies. Some funds maintain significant stock exposure even after retirement, while others take a more 澳洲幸运5官方开奖结果体彩网:conservative approach.

Stock Funds

This type of fund invests principally in equity or stocks. Within this group are assorted subcategories. Some equity funds are named for the size of the companies they invest in: firms with small-sized, midsized, or large-sized capitalization. Others are named by their investment approach: aggressive growth, income-oriented, and value. Equity funds are also categorized by whether they invest in U.S. stocks or foreign equities. To understand how these strategies and sizes of assets can combine, you can use an equity-style box like the example below.

澳洲幸运5官方开奖结果体彩网:Value funds invest in stocks their managers see as undervalued while aiming at long-term appreciation when the market recognizes the stocks’ true worth. These companies are characterized by low price-to-earnings (P/E) ratios, low price-to-book ratios, and dividend yields. Meanwhile, growth funds look to companies with solid earnings, sales, and cash flow growth. These companies typically have high price-to-earnings ratios and do not pay much in dividends. A compromise between strict value and growth investment i🃏s a “blend.” These funds invest in a mix of growth and value stocks 🍰to give a risk-to-reward profile somewhere in the middle.

Large-cap companies have 澳洲幸运5官方开奖结果体彩网:market capitalizations of over $10 billion. Market cap is derived by multiplying the share price by the number of shares outstanding. Large-cap stocks are typically for blue-chip firms whose names are recognizable. Small-cap stocks have a market cap between $250 million and $2 billion. These companies tend to be newer, riskier investments. Midcap stocks fill in the gap between small- and large-cap.

A mutual fund may combine different investment styles and company sizes. For example, a large-cap value fund might include꧃ in its portfolio large-cap companies that are in strong financial shape but have recently seen their share prices fall; these would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a sma꧃ll-cap growth fund that invests in startup technology companies with high growth prospects. This kind of fund is in the bottom right quadrant above (small and growth).

Bond Funds

A mutual fund that generates a consistent and minimum return is part of the 澳洲幸运5官方开奖结果体彩网:fixed-income category. These mutual funds focus on investments that pay a set rate of return, such as government bonds, corporate bonds, and other 澳洲幸运5官方开奖结果体彩网:debt instruments. The bonds should generate interest income tha♑t’s passed on to the shareholders, with limited investm൲ent risk.

There are also actively managed funds that look for relatively undervalued bonds to sell them at a profit. These mutual funds will likely pay higher returns but aren’t without risk. For example, a fund specializing in high-yield junk bonds is much riski🐓er than a fund that invests in gover🍎nment securities.

Because there are many different types of bonds, bond funds can vary dramatically depending on where and when they invest, and all bond funds have 澳洲幸运5官方开奖结果体彩网:interest rate risk.

Index Funds

Index mutual funds a🐠re designed to replicate the performance of a specific index, such as the S&P 500. This passive strategy requires less research from analysts and advisors, so fewer expenses are passed on to investors through fees, and these funds are designed with cost-sensitive investors in mind.

They also frequently outperform actively managed mutual funds and ♏thus potentially are the rare combination in life of lower costs anജd better performance.

Balanced Funds

Balanced funds invest across different securities, whether stocks, bonds, the 澳洲幸运5官方开奖结果体彩网:money market, or alternative investments. The objecti🥂ve of these funds, know𝐆n as an asset allocation fund, is to cut risk through diversification.

Money Market Funds

The money market consists of safe, risk-free, short-term debt instruments, mostly government Treasury bills. The returns on them aren’t substantial. A typical return is a little more than the amount earned in a regular 澳洲幸运5官方开奖结果体彩网:checking or savings account and a little less than the average 澳洲幸运5官方开奖结果体彩网:certificate of deposit (CD). Money market mutual funds are often used as a temporary holding place for cash that will be used for future investments or an emergency fu🔯nd.

While low risk, they aren’t insured by the Federal Deposit Insurance Corp. (FDIC) li🦩ke savings accounts or CDs.

Income Funds

澳洲幸运5官方开奖结果体彩网:Income funds are meant to disburse income on a steady basis, and are often seen as the mutual funds꧋ for retirement investing. They invest primarily in government and high-quality corporate debt, holding these bonds until maturity to provi⭕de interest streams. While fund holdings may rise in value, the primary goal is to offer a steady cash flow​.

International Funds

An 澳洲幸运5官方开奖结果体彩网:international mutual fund, or foreign fund, invests only in assets located outside an investor’s home country. Global funds, however, can invest anywhere worldwide. Their volatility depends on where and when the funds are invested.

Sector and Theme Funds

澳洲幸运5官方开奖结果体彩网:Sector mutual funds aim to profit from the performღance of specific industries, such as finance, technology, or healthcare. Theme funds can cut across sectors. For example, a fund focused on artificial intelligence (AI) might have holdings in firms in healthcare, defense, and other areas employing and building out AI beyond the tech industry.

Socially Responsible Mutual Funds

澳洲幸运5官方开奖结果体彩网:Socially responsible investing invests only in companies and sectors that meet preset criteria. For example, some 澳洲幸运5官方开奖结果体彩网:socially responsible funds don’t invest in industries like tobacco, alcoholic beverages, weapons, or nuclear power. 澳洲幸运5官方开奖结果体彩网:Sustainable mutual funds invest primarily in green technology, such as solar and win🐈d power or recycling.

There are also funds that review 澳洲幸运5官方开奖结果体彩网:environmental♔, social, and governance (ESG) factors when choosing investments. This approa✅ch focuses on the company’s management p♉ractices and whether they tend toward environmental and community improvement.

Top Mutual Funds

Below are five la𝐆rge mutual funds that represent a range of the types 🍰of funds listed above:

澳洲幸运5官方开奖结果体彩网:Vanguard 500 Index Fund (VFIAX)

The oldest such mutual fund, VFIAX tracks the 澳洲幸运5官方开奖结果体彩网:S&P 500 Index, making it a way to invest in 500 of America’s largest companies with a single purchase. With a very low 0.04% expense ratio (meaning you pay 40 cents annually per $1,000 invested), it requires a $3,000 minimum investment. Since its launch half a century ago, the fund has returned an average of about 8.19% annually.

澳洲幸运5官方开奖结果体彩网:Fidelity 500 Index Fund (FXAIX)

Like Vanguard’s offering, it charges even less: just 0.015% in annual expenses (15 cents per $1,000 invested) and has no minimum investment requirement. The fund invests in technology, financial, healthcare, and consumer companies, closely matching the S&P 500 Index while maintaining flexibility to invest up to 20% outside the index.

澳洲幸运5官方开奖结果体彩网:T. Rowe Price Divid♉end Growth Fund (PRDGX)

This actively managed fund focuses on companies that consistently pay and increase their regular cash payments to shareholders. While its 0.64% 澳洲幸运5官方开奖结果体彩网:expense ratio is higher than index funds, the strategy targets stable, financially healthy companies. The minimum investment is $2,500.

澳洲幸运5官方开奖结果体彩网:Fideᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚ♚ᩚlity ZERO International Index Fund (FZILX)

For investors seeking global diversification, this fund offers exposure to non-U.S. companies with no fees, a 0% expense ratio. The fund focuses on established international companies to help manage risk while providing worldwide investment exposure.

澳洲幸运5官方🎃开奖结果🍌体彩网:Vanguard Total Bond Market Index Fund (VBTLX)

This fund provides broad exposure to U.S. bonds, primarily government, and high-quality corporate debt. With a 0.04% expense ratio and a $3,000 minimum investment, it’s designed to provide steady income and help balance out the stock market’s risks.

How Mutual Fund Shares Are Priced

The value of the mutual fund depends on the performance of the securities it in▨vests in. When buying a unit or share of a mutual fund, you get a part of its portfolio value. Investing in a share of a mutual fund differs from investing in stock shares. Unlike stock, mutual fund shares do not give their holders voting rights. And unlike exchange-traded funds (ETFs), you can’t trade your shares throughout the trading day.

Mutual fund share prices come from the net asset value (NAV) per share, sometimes listed as NAVPS. A fund’s NAV is derived by dividing the total valueꦫ of the securities in the portfolio by the number of shares outstanding.

Mutual fund shares are typically bought or redeemed at the fund’s NAV, which doesn’t fluctuate during market hours but is settled at the end🐲 of each trading day. The price of a mutual fund is also updated when the NAVPS is settled.

How Are Earnings Calculated for Mutual Funds?

Investors typi💫cally earn returns fr🤪om a mutual fund in three ways:

1. Dividend/interest income: Mutual funds distribute the 澳洲幸运5官方开奖结果体彩网:dividends on stocks and interest on bonds held in their portfolios. Funds often give investors the choice of either receiving a deposit for distributions or reinvesting earnings for more shares in the mutual fund.
2. Portfolio distributions: If the fund sells securities that have increased in price, the fund realizes a 澳洲幸运5官方开奖结果体彩网:capital gain, which most funds also pass on to investors in a distribution.
3. Capital gains distribution: When the fund’s shares increase in price, you can sell your mutual fund shares for a profit in the market.

When researching the returns of 🔴a mutual fund, you’ll typically come upon a figure for the “total return,” or the net change in value (either up or down) over a specific period. This includes any interest, dividends, or capital gains the fund has generated, along with the change in its market value during a given period. In most cases, total returns are given for one-, five-, and 10-y🐬ear periods, as well as from the day the fund opened.

Advantages♕ and Disadvantages of Investing i🙈n Mutual Funds

There are many reasons why mutual funds have been the 澳洲幸运5官方开奖结果体彩网:retail investo♍r’s vehicle of choice, with an overwhelming majority of money in employer-sponsored retirement plans invested in mutual funds. The U.S. Securities and Exchange Commission (SEC), in particular, has long paid 💦very close attention to how these funds are run, given their imp🔯ortance to so many Americans and their retirements.

Advantages

Diversification: A diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers. A mutual fund can achieve diversification faster and more ch🌃eaply than buying individual securities.

Ease of Access: Since they trade on the major stock exchanges, mutual funds can be bought and sold with relative ease, making them highly liquid investments. Also, for certain types of assets, like foreign equities or 澳洲幸运5官方开奖结果体彩网:exotic commodities, mutual funds are often the most workable—sometim🥂es the only—way for individual investors to pa൩rticipate.

澳洲幸运5官方开奖结果体彩网:Economies of Scale: Because a mutual fund buys and sells large ဣamounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. A mutual fund can invest in certain assets or take larger positions than a smaller investor could.

Professional Management: A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. Mutual funds req🎉uire much lower investment minimums, providing a low-cost way for individual investors to experience and benefit from professional money management.

Transparency: Mutual funds are subject to industry regulations meant to ensure accountability and fairness for investors. In addition, the component securities of each mutual fund can be found across many platforms.

Disadvantages

Liquidity, diversification, and p🧸rofessional management all make mutual funds attractive options. However, there are drawbacks:

No FDIC Guarantee: Like many other investments without a guaranteed return, there is always the possibility that the value of your mutual fund will 澳洲幸运5官方开奖结果体彩网:depreciate. Equity mutual funds experience price fluctuations, along with the stocks in the fund’s portfolio. The FDIC does not guarantee mutual fund investments.

Cash Drag: To mainta🅺in liquidity and the ability to accommodate withdrawals, mutual funds typically have to keep a larger percentage of their portfolio as cash 🤪than other investments. Because this cash earns no return, it’s called a “cash drag.”

Higher Costs: Fees that reduce your overall payout from a mutual fund are assessed regardl🍬ess of the fund’s performance. Failing to pay attention to the fees can cost you, since actively managed funds incur transaction costs that accumulate and compound year over year.

Dilution: Dilution is also the result of a successful fund growing too big. When new money pours into funds with solid track records, the manager could have trouble finding suitable investments for all the new capital to be put to꧙ good use.

The SEC requires that funds have at least 80% of their assets in the particular type of investment implied by their title. How the remaining assets areꦛ invested is up to the fund manager. However, the categories that qualify for 80% of the assets can be vague and wide-ranging.

End-of-Day Trading Only: A mutual fund allows you to request that your shares be converted into cash anytime. However, unlike stocks and ETFs that trade throughout the day, mutual fund 澳洲幸运5官方开奖结果体彩网:redemptions can onl🎃y take place at the end of the trading day.

Taxes: When the mutual fund manager sells a security, a capital gains tax is triggered, which can be extended to you. ETFs, for example, avoid this through their creation and redemption mechanism. Your taxes can be lowered by investing in tax-sensitive funds or by holding non-tax-sensitive mutual funds in a tax-deferred account, such as a 401(k) or 澳洲幸运5官方开奖结果体彩网:individual retirement accou🌠nt (IRA).

Mutual Fund Fees

When investing in mutual funds, it’s essential to 澳洲幸运5官方开奖结果体彩网:understand⛦ t๊he fees associated with them, since these costs will significantly affect your investment returns over time. He🧸re are some common mutual fund fees:

Expense ratio: This is an annual fee that covers the fund’s operating expenses, including management fees, administrative costs, and marketing expenses. The 澳洲幸运5官方开奖结果体彩网:expense ratio is given as a percentage of the fund’s average net assets and is deducted from the fund’s returns. Pressured by competition from index investing and ETFs, mutual funds have lowered their expense ratios by more than half over the last 30 years (see below).

Sales charges or loads: Some mutual funds charge sales fees, known as loads, when you buy or sell shares. Front-end loads are charged when you buy shares, while back-end loads (or contingent and deferred sales charges) are assessed if you sell your shares before a certain date. Sometimes, however, management firms offer 澳洲幸运5官方开奖结果体彩网:no-load mutual funds, which don’t have commission or sales charges.

Redemption fees: Some mutual funds charge a 澳洲幸运5官方开奖结果体彩网:redemption fee when you sell shares within a short period (usually 30 to 180 days) after purchasing them, which the SEC limits to 2%. This fee is designed to 🤪discourage short-term tra𒁏ding in these funds for stability.

Other account fees: Some funds or brokerage firms may charge extra fees for maintaining your account or transactions, especially if your balance falls below a certain minimum.

Evaluating Mutual Funds

澳洲幸运5官方开奖结果体彩网:Researching and comparing funds can be more difficult than for other securities. Unlike stocks, mutual funds do not offer investors the opportunity to juxtapose the price-to-earnings (P/E) ratio, sales growth, 澳洲幸运5官方开奖结果体彩网:earnings per share, or other important data. A mutual fund’s NAV can offer some basis for comparison, but given thܫe diversity of portfolios, comparing the proverbial apples to apples can be difficult, even among funds with similar names or stated objectives. Only index funds tracking the same markets tend to be genuinely&🍸nbsp;comparable.

Mutual Funds vs. Index Funds

Index funds are mutu🌃al funds that aim to replicate the performance of a market benchmark or index. For example, an S&P 500 index fund tracks that index by holding the 500 companies in the same proportions. A key goal of index funds is minimizing costs to mirror their index closely.

By contrast, actively managed mutual fꦕunds try to beat the market by stock picking and shifting allocations. The fund manager seeks to achieve returns greater than a benchmark through their investing strategy and research.

Index funds offer market returns at lower costs, while active mutual funds aim for higher returns through skilled management that often comes at a higher price. When deciding between index or actively managed mutual fund investing, investors should consider costs, 澳洲幸运5官方开奖结果体彩网:time horizons, and 澳洲幸运5官方开奖结果体彩网:risk appetite.

Mutual Funds vs. ETFs

Mutual funds and ETFs are pooled investment funds that offer investors a stake in a 🐭diversified portfolio. ​However, there are some crucial differences.

Among the most important is that ETF shares are꧃ traded on stock exchanges like regular stocks, while mutual fund shares are traded only once daily after markets close. Th🍷is means ETFs can be traded anytime during market hours, offering more liquidity, flexibility, and real-time pricing. This flexibility means you can short-sell them or engage in the many strategies you would use for stocks.

Another significant difference is pricing and valuation. ETF prices, like stocks, fluctuate throughout the day according to supply and demand. Meanwhile, mutual funds are priced only at the 🧸end of each trading day based on the NAV of the underlying portfolio. This also means that ETFs have the potential for larger premiums/discounts to NAV than mutual funds.

澳洲幸运5官方开奖结果体彩网:Compared with mutual funds, ETFs tend to have certain tax advantages and are often more cost-efficient.

The Bottom Line

Mutual funds are versatile and accessible for those looking to diversify their portfolios. These funds combine money from inv🧸estors for stocks, bonds, real estate, derivatives, and other securities—all managed for you. Key benefits include access to diversified, professionally managed portfolios and the ability to choose funds tailored to different objectives and risk tolerances. However, mutual funds come with fees and expenses, including annual fees, expense ratios, and commissions, that will help determine your overall returns.

Investors can choose from many types of mutual funds, such as st💫ock, bond, 🍸money market, index, and target-date funds, each with its own investment focus and strategy. The returns on mutual funds come from dividends or interest and selling fund shares at a profit.