Mutual Fund
A mutual fund pools money from many investors to buy a diversified portfolio of securities. Unlike ETFs, mutual funds are priced once daily after market close. They come in two types: actively managed (a manager selects securities) and passively managed index funds.
Mutual funds are the most common investment vehicle in 401(k) plans. When you buy a mutual fund share, you own a proportional slice of all the securities in the fund. Distributions (dividends and capital gains) are typically reinvested automatically.
Actively managed mutual funds charge higher fees (expense ratios of 0.5–1.5%+) because of manager salaries and research costs. Index mutual funds track a benchmark and have very low fees (0.02–0.20%), making them functionally similar to index ETFs.
Key differences vs. ETFs: mutual funds can be purchased in fractional dollar amounts (making automatic investing easy), but they can only be bought at end-of-day NAV (not intraday). Many 401(k)s only offer mutual funds, not ETFs.
Related terms
- ETF (Exchange-Traded Fund)
- An ETF is a basket of securities — stocks, bonds, or other assets — that trades on a stock exchange like a single share. ETFs combine the diversification of a mutual fund with the flexibility of stock trading and typically have very low expense ratios.
- Index Fund
- An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.
- Expense Ratio
- An expense ratio is the annual fee a fund charges investors, expressed as a percentage of assets under management. It is deducted automatically from the fund's returns. Lower is almost always better.
- Diversification
- Diversification is the practice of spreading investments across different assets, sectors, or geographies to reduce risk. A diversified portfolio is less volatile than any single holding because losses in one area are offset by gains in others.