What Are Mutual Funds?
Mutual funds are investment vehicles that collect money from thousands of investors and use it to buy a diversified portfolio of securities. A professional fund manager selects and manages the investments according to the fund's stated objective.
Unlike ETFs, mutual funds are priced once per day at the close of trading (4:00 PM ET). When you buy or sell, you get the end-of-day price called the Net Asset Value (NAV).
Types of Mutual Funds
- Index Funds: Track a market index. Lowest fees. Best long-term choice. Learn more.
- Actively Managed: Fund manager picks stocks trying to beat the benchmark. Higher fees.
- Bond Funds: Invest in government and corporate bonds. Learn about bonds.
- Target-Date Funds: Automatically adjust allocation as you approach retirement.
- Money Market Funds: Ultra-safe, low-return funds similar to savings accounts.
- Sector Funds: Focus on specific sectors (technology, healthcare, energy).
Mutual Fund Fees to Watch
- Expense Ratio: Annual management fee. Index funds: 0.01-0.20%. Active: 0.50-1.50%.
- Load Fees: Sales charges. Front-end loads charge when you buy; back-end loads when you sell. Avoid loaded funds.
- 12b-1 Fees: Marketing and distribution fees included in the expense ratio.
A 1% fee difference costs over $100,000 on a $100,000 portfolio over 30 years. Always minimize fees.
Top Mutual Funds for Beginners
- FXAIX — Fidelity 500 Index (0.015% expense ratio, no minimum)
- VFIAX — Vanguard 500 Index Admiral ($3,000 minimum, 0.04%)
- SWTSX — Schwab Total Stock Market Index (no minimum, 0.03%)
- FZROX — Fidelity ZERO Total Market Index (0% expense ratio!)