What Is a Mutual Fund?
A mutual fund is a professionally managed investment fund that pools money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. Unlike ETFs, mutual funds are priced once daily at market close.
How Mutual Funds Work
Mutual funds collect money from thousands of individual investors and a professional fund manager uses that pooled capital to buy a portfolio of investments aligned with the fund's stated objective. When you buy shares of a mutual fund, you own a proportional slice of all the fund's underlying holdings.
Unlike ETFs, mutual funds are priced and traded once per day at the net asset value (NAV) calculated after market close. This means you cannot trade them in real time during the trading day. Mutual funds can be actively managed (a manager picks investments) or passively managed (tracking an index). Actively managed funds typically charge higher fees but aim to outperform their benchmark.
Why Mutual Funds Matter for Your Financial Goals
Mutual funds were the original way for everyday investors to access diversified, professionally managed portfolios. They remain the primary investment option in many 401(k) plans and are widely used in retirement accounts. For investors who prefer professional management and do not need intraday trading, mutual funds are a solid choice.
When comparing mutual funds to ETFs, the key differences are trading flexibility, fees, and tax efficiency. ETFs generally win on all three fronts, which is why they have grown in popularity. However, mutual funds still have advantages in certain situations — particularly within retirement accounts where the tax efficiency difference is irrelevant.
Key Takeaway
Mutual funds pool your money with other investors for professional management and diversification. Compare their fees and performance to similar ETFs before investing.
Related Terms
ETF
An ETF (Exchange-Traded Fund) is an investment fund that holds a collection of assets — stocks, bonds, or commodities — and trades on a stock exchange like an individual stock. ETFs offer the diversification of a mutual fund with the flexibility and real-time pricing of stock trading.
Index Fund
An index fund is a type of mutual fund or ETF designed to replicate the performance of a specific market index, like the S&P 500. Rather than trying to beat the market, index funds aim to match it — with low fees and broad diversification.
Expense Ratio
An expense ratio is the annual fee a mutual fund or ETF charges investors, expressed as a percentage of assets. For example, a 0.50% expense ratio means $5/year for every $1,000 invested. Lower ratios mean more of your returns stay in your pocket.
Diversification
Diversification is the investment strategy of spreading your money across different asset classes, industries, and geographies to reduce risk. The core principle: don't put all your eggs in one basket.