Key Takeaways
- Mutual funds are governed by the Investment Company Act of 1940, a regulatory framework that contains robust protections for investors.
- Mutual funds are well-suited to retirement accounts, where their tax inefficiency is irrelevant, and their automatic investment features support long-term saving.
- ETFs have taken market share away from mutual funds due to their reputation for lower fees and tax efficiency, but those advantages aren’t universal.
- Mutual funds can still play a valuable role in diversified portfolios, especially if you’re seeking active management or exposure to markets where ETFs are less effective due to their intraday price fluctuations or transparency.
Modern investment vehicles like exchange-traded funds (ETFs) and robo-advisors have overshadowed mutual funds in recent years. Long-term mutual funds in the U.S. saw a net outflow of $2.9 trillion over the past decade, while ETFs experienced net inflows of $4.5 trillion over the same period.
Despite this dramatic shift in public sentiment, mutual funds remain a powerful tool for long-term investors. Let’s explore what value they bring, why they may be underappreciated, and what role they can play in a well-diversified portfolio.
What Makes Mutual Funds Reliable?
Mutual funds have inherent advantages that support long-term investing strategies. In addition to built-in diversification across a pool of underlying securities, they’re subject to a robust regulatory framework designed to protect investors: the Investment Company Act of 1940.
“Mutual funds operate under one of the most comprehensive regulatory structures in global finance,” said Dan Kieffer, director of asset allocation at UMB Bank. “The ICA of 1940 enforces strict portfolio diversification rules, transparent reporting, limits on leverage, and clear fiduciary duties.”
The prevalence of active management is another important factor in mutual funds’ reliability. Many benefit from the ongoing supervision of investment professionals who are legally obligated to act in their shareholders’ best interest.
“Portfolio managers, analysts, and compliance teams continuously monitor holdings,” said Kieffer. “This expert oversight helps ensure discipline, alignment with stated mandates, and proper risk management.”
Note
In 2024, total assets in passive mutual funds and ETFs surpassed their active counterparts for the first time.
Where Mutual Funds Still Shine
Mutual funds remain a staple in retirement accounts. Their ability to support automatic investments can help you follow a consistent strategy, and since mutual fund prices only update after each trading session, you can make fixed contributions without worrying about fluctuating asset values.
“Mutual funds strike a net asset value (NAV) once per day, providing predictable execution and eliminating intraday trading frictions,” said Kieffer. “This smooths out noise, reduces the temptation to trade impulsively, and eliminates the bid-ask spread.”
Their potentially lower tax efficiency is also less relevant in tax-advantaged accounts, like 401(k)s and individual retirement arrangements (IRAs). These plans defer taxes on gains until withdrawal, letting your investments grow without tax drag.
Because of those various factors, workplace retirement plans typically use a mutual fund structure for their target-date funds. These automatically adjust their asset allocation to be more conservative as your retirement nears.
“Target-date funds, one of the most popular retirement options, are almost exclusively mutual-fund based,” said Robert Cannon, CFF, AIFA, founder of Experity Wealth. “They provide a hands-off, fully diversified glidepath that simplifies long-term saving for everyday investors.”
Why Mutual Funds May Be Underappreciated
Mutual funds have fallen out of favor as investors increasingly turn to more modern alternatives like ETFs and robo-advisors. This shift is partially due to the perception that mutual funds are inherently more expensive, less tax-efficient, and more likely to underperform than predominantly passive investment vehicles.
Note
U.S. ETFs are on pace for inflows of roughly $1.4 trillion in 2025, while mutual funds saw an estimated $481 billion in outflows during the first nine months of the year.
“Mutual funds are often overlooked today, largely because ETFs have captured the narrative around low cost and tax efficiency,” said Cannon. “Many investors assume mutual funds are always more expensive or less efficient, but that isn’t universally true.”
In reality, fees, efficiency, and performance vary significantly between funds. ETFs offer lower expense ratios on average, but that’s only on average. Similarly, some mutual funds are managed with tax efficiency in mind, and skilled managers can outperform passive indexes in certain market conditions.
Ultimately, the right mutual funds can still play a valuable role in a diversified portfolio, especially given their unique advantages.
“The industry’s innovation narrative skews publicity toward ETFs, but mutual funds remain the more functional tool for many investors,” said Kieffer.
“Mutual funds haven’t lost relevance—they’ve simply lost attention.” –Dan Kieffer, director of asset allocation at UMB Bank
The Role of Mutual Funds in a Diversified Portfolio
Mutual funds are often most effective inside retirement accounts, where their automatic investing capabilities align with long-term saving needs. Any tax inefficiency is also irrelevant, and they can provide access to automatic asset allocation through target-date funds.
Meanwhile, you can complement them with ETFs or direct holdings in taxable brokerage accounts. “An optimal portfolio often uses ETFs for precision allocation and tax-efficient satellites and mutual funds for long-term core holdings and automated retirement planning,” said Kieffer.
However, retirement accounts aren’t the only place where mutual funds can add value. They can also help you create active satellites when you believe a fund’s manager has the potential to outperform.
“For investors seeking active management in areas where research skill matters—like municipals, emerging markets, small-cap value, or active credit—mutual funds often provide cleaner exposure than ETFs,” said Kieffer.
What Are the Advantages of Mutual Funds Over ETFs?
Some of the advantages mutual funds have over ETFs include automatic investment capabilities, access to target-date funds, and once-per-day pricing, which can help prevent impulsive behaviors. Mutual funds also typically offer active professional oversight, which some investors may desire over passive management.
Do Mutual Funds Have Higher Fees Than ETFs?
Mutual funds have higher fees than ETFs on average because they’re typically actively managed, while ETFs are more likely to be passive. However, this isn’t a universal rule, as expense ratios depend on the individual fund.
Can Mutual Funds Outperform ETFs?
Active mutual funds with skilled managers have the potential to outperform passive ETFs in certain markets, but it’s difficult to predict which ones. Over the 10 years ending in June 2025, roughly 20% of active strategies beat their corresponding indexes.
The Bottom Line
Mutual funds may not be grabbing headlines like ETFs or digital platforms, but they remain a reliable tool for long-term investors—especially in retirement accounts. Their robust regulatory framework, automated investment capabilities, and active oversight can make them a valuable addition to a well-diversified portfolio.