What Are Mutual Funds?

What Is a Mutual Fund? Your Complete Guide

A mutual fund is a professionally managed investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. This pooled approach gives individual investors access to professionally managed portfolios that would be difficult to create independently. Mutual funds operate by issuing shares to investors, with each share representing partial ownership of the fund's total holdings.

As the investment landscape evolves, it's important to understand how mutual funds compare to other investment opportunities. For a personalized recommendation on whether mutual funds align with your investment goals, try our interactive investment quiz to receive tailored guidance.

How Mutual Funds Work: The Fundamentals

Professional Management: Each mutual fund is overseen by a portfolio manager or management team who make all investment decisions based on the fund's stated objectives. This professional management is one of the primary benefits of mutual fund investing, especially for those who lack the time, expertise, or desire to manage their own investments.

Net Asset Value (NAV): Unlike stocks, which trade throughout the day at market-determined prices, mutual funds are priced once per day at their net asset value (NAV). The NAV represents the total value of the fund's holdings divided by the number of outstanding shares, calculated after the market closes each trading day.

Buying and Selling: When you invest in a mutual fund, you're purchasing shares directly from the fund company rather than from other investors on an exchange. Similarly, when you sell your shares, you redeem them with the fund company at the current NAV.

Minimum Investments: Most mutual funds require a minimum initial investment, typically ranging from $500 to $3,000 for retail investor class shares, though some funds may have higher minimums.

Types of Mutual Funds: Finding the Right Investment

Mutual funds come in many varieties, each designed to meet different investment objectives:

Equity Funds: Invest primarily in stocks, with numerous sub-categories:

• Growth funds: Focus on companies with strong growth potential
• Value funds: Target undervalued companies
• Large-cap, mid-cap, and small-cap funds: Categorized by company size
• Sector funds: Concentrate on specific industries like technology, healthcare, or energy
• International/global funds: Invest in foreign markets

Bond Funds: Invest primarily in fixed-income securities:

• Government bond funds: Focus on U.S. Treasury securities
• Corporate bond funds: Invest in corporate debt
• Municipal bond funds: Hold tax-exempt municipal bonds
• High-yield bond funds: Invest in lower-rated, higher-yielding bonds

Money Market Funds: Invest in short-term, high-quality debt instruments, offering lower returns with higher liquidity and safety.

Balanced/Hybrid Funds: Maintain a mix of stocks and bonds, providing a more moderate risk profile.

Target-Date Funds: Automatically adjust asset allocation to become more conservative as a target retirement date approaches.

Index Funds: Passively track a specific market index rather than trying to outperform it.

While traditional mutual funds focus on public markets, investors seeking alternative investments may want to explore our private equity and alternative fund offerings that provide access to non-public market opportunities with different risk-return profiles.

The Best Mutual Funds for 2025: Key Considerations

When looking for the best mutual funds for 2025, consider these important factors:

Performance Track Record: While past performance doesn't guarantee future results, a fund's historical returns provide insight into how it has performed through different market conditions. Look for consistent performance relative to appropriate benchmarks over 3, 5, and 10-year periods.

Expense Ratio: This annual fee covers the fund's operating costs. Lower expense ratios mean more of your money stays invested. For actively managed funds, expense ratios typically range from 0.5% to 1.25%, while passively managed index funds may charge as little as 0.03% to 0.2%.

Fund Manager Experience: For actively managed funds, the experience and tenure of the portfolio manager or management team can be crucial.

Risk Measures: Examine metrics like standard deviation, Sharpe ratio, and beta to understand a fund's risk profile.

Asset Size: Very large funds may struggle to maintain their investment strategy, while very small funds might have higher expense ratios or liquidity concerns.

Some of the top-performing mutual fund families in 2025 include Vanguard, Fidelity, T. Rowe Price, and American Funds, each offering a range of options across different asset classes and investment styles.

For insights on how mutual funds could complement alternative investments in your portfolio, explore our private market fund comparison tool to evaluate different investment options side by side.

Mutual Fund vs. ETF: Understanding the Differences

Exchange-Traded Funds (ETFs) share many similarities with mutual funds but have several key differences:

Feature	Mutual Funds	ETFs
Trading	Priced once daily at NAV	Trade throughout the day like stocks
Minimum Investment	Often requires minimum initial investment	Can purchase as little as one share
Management	Can be actively or passively managed	Predominantly passively managed (index-based)
Tax Efficiency	May distribute capital gains to shareholders	Generally more tax-efficient due to creation/redemption process
Expense Ratios	Typically higher (especially for actively managed funds)	Usually lower
Transparency	Holdings disclosed quarterly	Most disclose holdings daily

For many investors, the choice between mutual funds and ETFs comes down to their investment style, tax situation, and how they plan to use the investment in their portfolio. The Securities and Exchange Commission (SEC) provides additional educational resources on both investment vehicles.

How to Invest in Mutual Funds: A Step-by-Step Guide

Investing in mutual funds is a straightforward process:

1. Define Your Investment Goals: Determine your financial objectives, time horizon, and risk tolerance. Our investment quiz can help you clarify these parameters.

2. Research Funds: Use resources like Morningstar, financial publications, and fund company websites to identify funds that align with your goals.

3. Choose an Investment Platform: You can purchase mutual funds through:

   • Direct investment with fund companies (e.g., Vanguard, Fidelity)
   • Online brokerages
   • Financial advisors
   • Employer-sponsored retirement plans (401(k), 403(b))
   • Robo-advisors

4. Review the Prospectus: Before investing, read the fund's prospectus to understand its investment strategy, risks, and fees.

5. Make Your Investment: Complete the application and fund your account through electronic transfer, check, or rollover from another account.

6. Set Up a Regular Investment Plan: Consider establishing automatic contributions to benefit from dollar-cost averaging.

7. Monitor and Rebalance: Periodically review your investments to ensure they remain aligned with your goals, rebalancing as necessary.

What Is a Money Market Mutual Fund? Understanding Low-Risk Options

Money market mutual funds are a specialized type of mutual fund that invests in high-quality, short-term debt securities. These funds aim to maintain a stable NAV of $1 per share while providing modest returns and high liquidity.

Key Features:

• Safety: Invest in high-quality, short-term debt instruments (Treasury bills, commercial paper, certificates of deposit)
• Liquidity: Allow investors to access their money quickly, often with check-writing privileges
• Low Returns: Typically offer higher yields than savings accounts but lower than other mutual funds
• Stability: Seek to maintain a constant $1 NAV (though this is not guaranteed)

Money market funds can serve as an emergency fund, a parking place for cash awaiting investment, or a conservative component of a diversified portfolio. While generally considered low-risk, they are not FDIC-insured and can potentially lose value.

The Financial Industry Regulatory Authority (FINRA) offers comprehensive resources for understanding money market mutual funds and their role in your portfolio.

Mutual Fund Fees: Understanding the Costs

Mutual fund fees can significantly impact your long-term returns:

Expense Ratio: The annual fee covering the fund's operating expenses, including management fees, administrative costs, and 12b-1 (marketing) fees. This is expressed as a percentage of assets and is deducted from the fund's returns.

Load Fees: Sales charges that may be applied when buying (front-load) or selling (back-load) shares:

• Front-load: Charged upon purchase, typically 3-5.75%
• Back-load: Charged when selling shares, often declining the longer you hold the fund
• No-load: No sales charges for buying or selling

Transaction Fees: Some brokerages charge fees for buying or selling certain mutual funds.

Account Fees: Annual maintenance fees that some brokerages charge for holding mutual funds.

Always consider the total cost of ownership when evaluating mutual funds, as higher fees can erode returns over time. Many excellent no-load funds with low expense ratios are available across all fund categories.

For a comparison of fee structures between mutual funds and alternative investments, visit our funds directory where we provide transparent fee information for various investment vehicles.

Frequently Asked Questions About Mutual Funds

What is a mutual fund's objective? A mutual fund's objective describes its investment goals and approach. Common objectives include growth, income, or a balance of both. The fund's objective will determine what securities it invests in and its risk profile.

How are mutual funds taxed? Mutual funds pass through income and capital gains to shareholders, who must report these distributions on their tax returns. Distributions are taxable in the year received, even if reinvested, unless the fund is held in a tax-advantaged account like an IRA or 401(k). The IRS provides detailed guidance on mutual fund taxation.

Can I lose money in a mutual fund? Yes, mutual funds are investments that carry risk, and their value will fluctuate with market conditions. Even conservative mutual funds can lose value, though typically with less volatility than more aggressive options.

What's the difference between active and passive mutual funds? Actively managed funds employ portfolio managers who make specific investment selections aiming to outperform a benchmark index. Passive funds (index funds) simply track a market index, offering lower costs but no potential for market outperformance.

How do I choose between multiple share classes? Many mutual funds offer multiple share classes (A, B, C, I, R, etc.) with different fee structures. The best choice depends on your investment amount, time horizon, and whether you're working with a financial advisor.

Conclusion: Are Mutual Funds Right for Your Portfolio?

Mutual funds remain one of the most popular investment vehicles for both beginning and experienced investors, offering professional management, diversification, and accessibility. Whether mutual funds are right for your portfolio depends on your individual financial situation, investment goals, and preferences.

For beginners or those seeking a hands-off approach, mutual funds provide an excellent entry point to the markets with built-in diversification. For more experienced investors, carefully selected mutual funds can serve as core portfolio holdings or tactical allocations to specific market segments.

In 2025's complex market environment, mutual funds continue to offer valuable benefits as part of a well-constructed investment strategy. By understanding the different types available, comparing options thoroughly, and keeping costs in mind, investors can leverage mutual funds to help achieve their long-term financial goals.

Ready to explore how mutual funds might fit into your broader investment strategy? Take our investment quiz or browse our fund comparison tool to see how different investment vehicles stack up against your financial objectives.