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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Clear out junk files and repair common Windows errorsFree Scan →A mutual fund pools money from many investors to buy stocks, bonds, money-market instruments, or other investments. You own shares of the fund, not its individual holdings; the value of your shares is based on the fund’s net asset value (NAV). Mutual funds can make it easier to hold a range of investments, but they are not guaranteed or FDIC-insured, and you can lose money.
How mutual funds work
Investors buy shares in a pooled portfolio. The fund’s investments and strategy determine its risks and potential returns. Diversification may reduce the effect of a single company’s poor performance, but it does not eliminate investment risk or prevent losses across the fund.
Mutual fund purchases and redemptions are generally processed at the next calculated NAV. Applicable redemption fees may reduce the amount you receive. This differs from an ETF, whose shares trade on an exchange during the trading day.
How mutual funds differ
Funds vary in their objectives, strategies, holdings, and risks. A fund may invest in stocks, bonds, money-market instruments, other assets, or a combination. Read the fund’s prospectus to understand what it is trying to do and what risks it takes.
#1 Best Overall
| Approach | How it works | What to consider |
|---|---|---|
| Active management | An adviser selects investments in pursuit of the fund’s objective. | Review the strategy, risks, costs, and performance in context. |
| Index management | The fund seeks to track an index by holding all or a representative sample of its securities. | Tracking can differ from index results because of sampling, fees, expenses, and trading costs. Index funds still carry market risk. |
Passive management may lower costs, but not every index fund costs less than every actively managed fund. Mutual funds and ETFs can both use active or passive strategies; their trading and fee details differ.
Understand fees and expenses
Costs reduce the returns investors receive. Depending on the fund and how you buy or hold it, charges may include sales loads, redemption or exchange fees, purchase or account fees, and recurring operating expenses. Operating expenses can cover advisory, marketing and distribution, brokerage, custody, transfer agency, legal, and accounting costs. Some costs are deducted from fund assets and reduce returns indirectly.
Different share classes of the same fund may hold the same investments but charge different loads or operating expenses. A higher-cost fund must perform better than a lower-cost fund to produce the same return for its investor.
- Find the standardized fee table in the fund prospectus.
- Check the share class, sales loads, annual operating expenses, and any fee waivers or reimbursements.
- Look for acquired-fund fees if the fund invests in other funds.
- Check for brokerage, account, or intermediary charges that may not appear in the fund’s fee table.
- Compare the total costs of funds with similar objectives and strategies. The SEC points investors to FINRA’s Fund Analyzer to compare fund costs.
What to check before investing
A prospectus presents key information in a standardized order, including objectives, fees, investments, risks, performance, management, purchase and sale terms, tax information, and intermediary compensation. Read it and the latest shareholder report before investing. These documents provide information for evaluating a fund; they do not establish that it is right for every investor.
- Objective and strategy: What is the fund trying to do, and what may it hold?
- Risk and diversification: What are the principal risks? Are the holdings concentrated, and how would they fit alongside your other investments?
- Costs: What share class, loads, operating expenses, waivers, transaction or account fees, and intermediary charges apply?
- Management and benchmark: Is the fund actively managed or tracking an index? If indexed, how is the index constructed, and how closely has the fund tracked it?
- Performance: Review standardized historical performance disclosures in context. Past performance does not guarantee future results.
- Access and redemption: What minimums and purchase or sale procedures apply, and are there fees?
Risks and diversification
A fund’s risks depend on its investments and strategy. Stock, bond, and other investments can decline in value; a fund can lose money even when it holds many securities. Diversification may reduce the impact of one company’s failure, but it cannot remove the risks of the fund’s holdings or protect against every market decline.
When comparing funds, ask: “What specific risks are associated with this fund?” and “What fees and expenses can I expect to pay for buying, owning, and selling this fund?” Also consider whether the fund’s strategy fits your goals and how its holdings fit with your broader portfolio.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.FAQ
Are mutual funds guaranteed or FDIC-insured?
No. Mutual funds are not insured by the FDIC or another government agency and are not guaranteed. You can lose money.
Can I sell mutual fund shares during the trading day?
Mutual fund purchases and redemptions are generally processed at the next calculated NAV, rather than at an intraday exchange price. Applicable redemption fees may apply. ETFs trade on an exchange, so their trading process differs.
Are index mutual funds always cheaper than actively managed funds?
No. Passive management may lower costs, but an index fund is not necessarily cheaper than every active fund. Compare the relevant share class and all applicable costs.
Does an index fund exactly match its index?
Not necessarily. Sampling, fees, expenses, and trading costs can cause the fund’s results to differ from its index. Index funds also retain market risk.
Where can I find a fund’s fees and risks?
Start with the prospectus and its standardized fee table, then review the most recent shareholder report. Check for charges that may not appear in the fund’s fee table, such as brokerage or intermediary charges.
Quick Recap
Sources
- SEC Investor.gov: Mutual Funds
- SEC Investor.gov: Mutual Fund Prospectus
- SEC Investor.gov: Mutual Fund and ETF Fees and Expenses
- SEC Investor.gov: Index Funds
- SEC Investor.gov: Characteristics of Mutual Funds and ETFs
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