Growing your wealth with individual stocks requires extensive research and comes with considerable risk.
A mutual fund allows you to pool your money with other investors to buy stocks, bonds and other securities. Because mutual funds typically involve a larger number of asset types, they diversify your portfolio and reduce your risk with lower costs.
Here’s what you need to know about mutual funds, including how they work, how to invest in them and more.
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How do mutual funds work?
Mutual funds work by pooling money from multiple investors to purchase stocks, bonds and other securities. Because they draw from a collection of companies, they offer immediate diversification at a lower cost — and without having to work with an advisor. Instead of owning shares of the company, however, you own shares in the fund.
The price of a share is determined by dividing the total value of its assets by the number of outstanding shares. This figure is known as the net asset value.
You can buy shares of mutual funds from a broker, although your 401(k) or other employer-sponsored retirement plan may also invest in mutual funds.
Types of mutual funds
There are many different types of mutual funds. These are some of the most popular.
Index funds
Also known as passive funds, index funds match the performance of a benchmark index like the S&P 500 or the Dow Jones Industrial Average. A mutual fund can be an index fund, but so can an ETF. Because they only have to meet an index, they require less management and usually have lower fees.
Money market funds
Money market funds offer low volatility for an investment product and can be easily accessed (generally the next business day). They can include CDs, bonds, Treasury bills and debt-based and cash equivalent securities — all of which are low-risk investments.
Because of their availability and modest return, money market funds are usually considered short-term investments.
Equity funds
Since they’re primarily invested in stocks, equity funds are also known as stock funds. They’re the most popular form of mutual fund, and can focus on the domestic or international market, on certain sized companies or particular business sectors. Equity funds can also be managed actively or passively.
Target-date funds
Target-date funds are framed around when an investor plans to retire, so they commonly appear in 401(k) plans. These accounts focus on higher-growth, higher-risk stocks early on, but then gradually move to lower-return, lower-risk bonds as you near retirement.
Bond funds
Bond funds feature corporate bonds, Treasury bonds and other debt securities. Because there’s a set rate of return, they’re also known as fixed-income funds.
While bond funds have less potential for growth than equity funds, they’re also considered a safer investment — which makes them one of the most popular types of mutual funds.
How do I invest in a mutual fund?
You can start investing in a mutual fund through a brokerage firm. If you want to maximize your investment, look for a broker with no transaction fee (a charge for buying or selling shares) and a low expense ratio (the fee to manage the fund).
Fidelity Investments has thousands of mutual funds with no transaction fees (though some may require specific deposit amounts). Fidelity Go®, the firm’s robo-advisor, invests in mutual funds with no management fees or expense ratios.
Fidelity Investments
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen
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Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)
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Bonus
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Investment vehicles
Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®
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Investment options
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
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Educational resources
Extensive tools and industry-leading, in-depth research from 20-plus independent providers
Charles Schwab also offers mutual funds with zero transaction fees and, in 2023, the asset-weighted average of Schwab’s expense ratio was only 0.05%. In comparison, the average expense ratio for all bond funds in 2023 was 0.37%, according to the Investment Company Institute. For equity funds, it was 0.42%.
Charles Schwab
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
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Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
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Bonus
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Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™, Schwab Organization Account and Schwab Trading Powered by Ameritrade™
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Investment options
Stocks, bonds, mutual funds, CDs and ETFs
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Educational resources
Extensive retirement planning tools
Wealthfront
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
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Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
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Bonus
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Investment vehicles
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Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
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Educational resources
Offers free financial planning for college planning, retirement and homebuying
Betterment
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn’t require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
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Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
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Investment vehicles
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Investment options
Stocks, bonds, ETFs and cash
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Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Mutual funds vs. ETFs
Mutual funds and exchange-traded funds (ETFs) both contain stocks, bonds and other assets, but substantial differences exist.
ETFs are traded throughout the day, so their price can change frequently. Mutual funds are only traded once daily (after the market closes), so their share prices don’t fluctuate.
In addition, ETFs are passively invested, meaning they aim to keep up with a benchmark index like the S&P 500 or the Dow. Mutual funds, on the other hand, are usually actively managed and try to beat the benchmark. As a result, the fees associated with mutual funds are typically higher.
Many mutual funds require a minimum investment, which could range from $500 to $3,000, while ETFs don’t have a minimum.
Mutual funds and taxes
Distributions from a mutual fund are taxed, whether they’re paid out in cash or reinvested. Your brokerage should provide you with IRS Form 1099-DIV after the end of the calendar year.
If your mutual funds are part of a 401(k) or IRA, you typically don’t have to pay taxes until you start making qualified distributions in retirement.
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FAQs
What is a mutual fund?
A mutual fund is an investment vehicle that allows multiple investors to pool their money to buy stocks, bonds and other securities. A fund manager determines which assets to buy and when to sell.
How do mutual funds work?
A group of investors pool their money to purchase a variety of securities. Rather than having shares in an individual company, you have shares in the mutual fund.
Do mutual funds pay dividends?
Yes, dividends are a significant part of the return on a mutual fund. The remainder comes from bond interest.
Are mutual funds a good investment?
Mutual funds are considered a safer investment and provide more diversification than buying shares in an individual stock.
Bottom line
Mutual funds are a good way to diversify where your investing money goes, and passively managed mutual funds like index funds and ETFs (as opposed to actively managed mutual funds) are a more affordable route.
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