Mutual funds let you buy “baskets” of assets — like stocks, bonds, or other securities — all at once, for an easy way to diversify your portfolio. These funds pool investor money, so you can buy (more affordable) shares that represent a piece of all the assets in the basket.

Mutual funds: The basics

When you buy mutual fund shares, you participate in the performance of all the assets in the basket without having to buy each one. Your investments are professionally managed according to the mutual fund mandate, and the mix of investments makes mutual funds a good way to diversify. 

What’s included in a mutual fund?

Mutual funds select assets based on their unique goals and strategy. Many hold traditional securities: stocks, bonds, and cash-similar assets like Treasuries. Some include or specialize in alternative holdings like commodities, real estate, or even other mutual funds. 

Why can mutual funds be a good investment?

Mutual funds can instantly diversify your portfolio and give you easy access to several assets and strategies. Since mutual funds trade in larger sizes than an individual usually would, they may also cut down on trading fees. Plus, with professional money managers making the decisions, you won’t need to spend time trying to become an investment expert. 

Why can mutual funds be a bad investment?

Mutual funds that charge high fees might not be worth it — especially if they fail to perform. You also don’t control which specific holdings the fund includes, and you might not have as much detailed information about your investments because mutual funds only share their holdings quarterly. Plus, when the fund trades, you may be on the hook for unexpected capital gains taxes.

What role do mutual funds play in an investment strategy?

Since mutual funds come in many flavors and risk levels, you can mix and match funds to fit your investment strategy. For instance, you might buy funds that grow income; follow environmental, social, and governance (ESG) principles; or invest in different countries. And since they hold so many different assets, mutual funds can make it easy to diversify quickly and cheaply. 

Types of mutual funds

You can divide mutual funds into several categories based on their assets or strategy. Each type of mutual fund offers unique benefits and risks to consider before investing. 

Actively managed funds 

Actively managed mutual funds try to outperform benchmarks (like the S&P 500 index). Portfolio managers do a lot of research and decide how to handle investments, which might include choosing the right time to buy or sell. However, the higher fees and tendency to trade more frequently may result in worse long-term outcomes. 

Index funds

Index funds, or passively managed funds, track specific indexes like the S&P 500 or Nasdaq 100. Less trading often translates into lower fees, a clearer view of investments, and more tax efficiency compared to active funds. But since their performance mirrors their chosen index, their returns usually don’t differ much from the benchmark. 

Asset-specific funds 

Some mutual funds focus on specific assets, like stock funds, bond funds, commodity funds, or real estate funds. They may also follow set strategies, like investing only in large-cap or income-producing stocks. You can use these funds to quickly diversify your portfolio with specific kinds of securities. 

Target-date funds 

Target-date funds follow an investment strategy that will (hopefully) achieve a particular goal by a set date. Often, they start with higher-risk assets and move to lower-risk assets as the “target date” gets closer. Many retirement plans use target-date funds to manage long-term diversification and risk.  

Specialty mutual funds 

Specialty mutual funds invest in nontraditional assets or strategies to meet their goals. For instance, a fund might invest only in specific industries, countries, or commodities. Others follow “themes,” like buying only environmentally friendly assets. 

Load funds vs. no-load funds 

Every mutual fund sets its own fee schedule. Load funds charge sales fees when you buy or when you sell shares, which eats into your profits. No-load funds don’t charge these fees, though they may charge other fees. 

ETFs vs mutual funds

Both mutual funds and ETFs pool investor dollars to buy a diversified basket of securities that follow set strategies or themes. However, mutual funds only trade once a day at a set price, while ETFs trade on exchanges during market hours. Additionally, ETFs may be more cost- and tax-efficient than mutual funds. 

How can you purchase mutual funds?

To buy mutual funds, you need a brokerage or retirement account that offers mutual fund investments. You’ll also need enough cash to meet each fund’s minimum investment requirement, which can range from hundreds to thousands of dollars. After that, you’ll follow the brokerage or retirement firm’s process to buy mutual funds, which might just require a few clicks!

Which mutual fund should you buy?

Buying mutual funds, like any other investment, is highly personal. You’ll want to choose funds with appropriate risk and diversification that fit your financial goals. There’s no universally right or wrong fund to buy — just the right or wrong fund for you.