Trading Mutual Funds for Beginners

Buying shares in mutual funds can be intimidating for beginning investors. There is a huge amount of funds available, all with different investment strategies and asset groups. Trading shares in mutual funds are different from trading shares in stocks or exchange-traded funds (ETFs). The fees charged for mutual funds can be complicated. Understanding these fees is important since they have a large impact on the performance of investments in a fund.

What Are Mutual Funds?

A mutual fund is an investment company that takes money from many investors and pools it together in one large pot. The professional manager for the fund invests the money in different types of assets including stocks, bonds, commodities, and even real estate. An investor buys shares in the mutual fund. These shares represent an ownership interest in a portion of the assets owned by the fund. Mutual funds are designed for longer-term investors and are not meant to be traded frequently due to their fee structures.

Mutual funds are often attractive to investors because they are widely diversified. Diversification helps to minimize risk to an investment. Rather than having to research and make an individual decision as to each type of asset to include in a portfolio, mutual funds offer a single comprehensive investment vehicle. Some mutual funds can have thousands of different holdings. Mutual funds are also very liquid. It is easy to buy and redeem shares in mutual funds.

There is a wide variety of mutual funds to consider. A few of the major fund types are bond funds, stock funds, balanced funds, and index funds.

Bond funds hold fixed-income securities as assets. These bonds pay regular interest to their holders. The mutual fund makes distributions to mutual fund holders of this interest.

Stock funds make investments in the shares of different companies. Stock funds seek to profit mainly by the appreciation of the shares over time, as well as dividend payments. Stock funds often have a strategy of investing in companies based on their market capitalization, the total dollar value of a company’s outstanding shares. For example, large-cap stocks are defined as those with market capitalizations over $10 billion. Stock funds may specialize in large-, mid-or small-cap stocks. Small-cap funds tend to have higher volatility than large-cap funds.

Balanced funds hold a mix of bonds and stocks. The distribution among stocks and bonds in these funds varies depending on the fund’s strategy. Index funds track the performance of an index such as the S&P 500. These funds are passively managed. They hold similar assets to the index being tracked. Fees for these types of funds are lower due to infrequent turnover in assets and passive management.

How Mutual Funds Trade

The mechanics of trading mutual funds are different from those of ETFs and stocks. Mutual funds require minimum investments of anywhere from $1,000 to $5,000, unlike stocks and ETFs where the minimum investment is one share. Mutual funds trade only once a day after the markets close. Stocks and ETFs can be traded at any point during the trading day.

The price for the shares in a mutual fund is determined by the net asset value (NAV) calculated after the market closes. The NAV is calculated by dividing the total value of all the assets in the portfolio, less any liabilities, by the number of outstanding shares. This is different from stocks and ETFs, wherein prices fluctuate during the trading day.

An investor is buying or redeeming mutual fund shares directly from the fund itself. This is different from stocks and ETFs, wherein the counterparty to the buying or selling of a share is another participant in the market. Mutual funds charge different fees for buying or redeeming shares.

Mutual Fund Charges and Fees

It is critical for investors to understand the type of fees and charges associated with buying and redeeming mutual fund shares. These fees vary widely and can have a dramatic impact on the performance of an investment in the fund.

Some mutual funds charge load fees when buying or redeeming shares in the fund. The load is similar to the commission paid when buying or selling a stock. The load fee compensates the sale intermediary for the time and expertise in selecting the fund for the investor. Load fees can be anywhere from 4% to 8% of the amount invested in the fund. A front-end load is charged when an investor first buys shares in the fund.

A back-end load also called a deferred sales charge, is charged if the fund shares are sold within a certain time frame after first purchasing them. The back-end load is usually higher in the first year after buying the shares but then goes down each year after that. For example, a fund may charge 6% if shares are redeemed in the first year of ownership, and then it may reduce that fee by 1% each year until the sixth year when no fee is charged.

A level-load fee is an annual charge deducted from the assets in a fund to pay for distribution and marketing costs for the fund. These fees are also known as 12b-1 fees. They are a fixed percentage of the fund’s average net assets. Notably, 12b-1 fees are considered part of the expense ratio for a fund.

The expense ratio includes ongoing fees and expenses for the fund. Expense ratios can vary widely but are generally 0.5 to 1.25%. Passively managed funds, such as index funds, usually have lower expense ratios than actively managed funds. Passive funds have a lower turnover in their holdings. They are not attempting to outperform a benchmark index, but just try to duplicate it, and thus do not need to compensate the fund manager for his expertise in choosing investment assets.

Load fees and expense ratios can be a significant drag on investment performance. Funds that charge loads must outperform their benchmark index or similar funds to justify the fees. Many studies show that load funds often do not perform better than their no-load counterparts. Thus, it makes little sense for most investors to buy shares in a fund with loads. Similarly, funds with higher expense ratios also tend to perform worse than low expense funds.

Because their higher expenses drag down returns, actively managed mutual funds sometimes get a bad rap as a group overall. But many international markets (especially the emerging ones) are just too difficult for direct investment—they're not highly liquid or investor-friendly—and they have no comprehensive index to follow. In this case, it pays to have a professional manager help wade through all of the complexities, and who is worth paying an active fee for.

Risk Tolerance and Investment Goals

The first step in determining the suitability of any investment product is to assess risk tolerance. This is the ability and desire to take on risk in return for the possibility of higher returns. Though mutual funds are often considered one of the safer investments on the market, certain types of mutual funds are not suitable for those whose main goal is to avoid losses at all costs. Aggressive stock funds, for example, are not suitable for investors with very low-risk tolerances. Similarly, some high-yield bond funds may also be too risky if they invest in low-rated or junk bonds to generate higher returns.

Your specific investment goals are the next most important consideration when assessing the suitability of mutual funds, making some mutual funds more appropriate than others.

For an investor whose main goal is to preserve capital, meaning she is willing to accept lower gains in return for the security of knowing her initial investment is safe, high-risk funds are not a good fit. This type of investor has a very low-risk tolerance and should avoid most stock funds and many more aggressive bond funds. Instead, look to bond funds that invest in only highly rated government or corporate bonds or money market funds.

If an investor's chief aim is to generate big returns, they are likely willing to take on more risk. In this case, high-yield stock and bond funds can be excellent choices. Though the potential for loss is greater, these funds have professional managers who are more likely than the average retail investor to generate substantial profits by buying and selling cutting-edge stocks and risky debt securities. Investors looking to aggressively grow their wealth are not well suited to money market funds and other highly stable products because the rate of return is often not much greater than inflation.

Income or Growth?

Mutual funds generate two kinds of income: capital gains and dividends. Though any net profits generated by a fund must be passed on to shareholders at least once a year, the frequency with which different funds make distributions varies widely.

If you are looking to grow wealth over the long-term and are not concerned with generating immediate income, funds that focus on growth stocks and use a buy-and-hold strategy are best because they generally incur lower expenses and have a lower tax impact than other types of funds.

If, instead, you want to use your investment to create a regular income, dividend-bearing funds are an excellent choice. These funds invest in a variety of dividend-bearing stocks and interest-bearing bonds and pay dividends at least annually but often quarterly or semi-annually. Though stock-heavy funds are riskier, these types of balanced funds come in a range of stock-to-bond ratios.

Tax Strategy

When assessing the suitability of mutual funds, it is important to consider taxes. Depending on an investor's current financial situation, income from mutual funds can have a serious impact on an investor's annual tax liability. The more income you earn in a given year, the higher your ordinary income and capital gains tax brackets.

Dividend-bearing funds are a poor choice for those looking to minimize their tax liability. Though funds that employ a long-term investment strategy may pay qualified dividends, which are taxed at the lower capital gains rate, any dividend payments increase an investor's taxable income for the year. The best choice is to choose funds that focus more on long-term capital gains and avoid dividend stocks or interest-bearing corporate bonds.

Funds that invest in tax-free government or municipal bonds generate interest that is not subject to federal income tax. So, these products may be a good choice. However, not all tax-free bonds are completely tax-free, so make sure to verify whether those earnings are subject to state or local taxes.

Many funds offer products managed with the specific goal of tax-efficiency. These funds employ a buy-and-hold strategy and eschew dividend- or interest-paying securities. They come in a variety of forms, so it's important to consider risk tolerance and investment goals when looking at a tax-efficient fund.

There are many metrics to study before deciding to invest in a mutual fund. Mutual fund rater Morningstar (MORN) offers a great site to analyze funds and offers details on funds that include details on its asset allocation and mix between stocks, bonds, cash, and any alternative assets that may be held. It also popularized the investment style box that breaks a fund down between the market cap it focuses on (small, mid, and large cap) and investment style (value, growth, or blend, which is a mix of value and growth). Other key categories cover the following:

A fund’s expense ratios

An overview of its investment holdings

Biographical details of the management team

How strong its stewardship skills are

How long it has been around

For a fund to be a buy, it should have a mix of the following characteristics: a great long-term (not short-term) track record, charge a reasonably low fee compared to the peer group, invest with a consistent approach based off the style box and possess a management team that has been in place for a long time. Morningstar sums up all of these metrics in a star rating, which is a good place to start to get a feel for how strong a mutual fund has been. However, keep in mind that the rating is backward-focused.

Investment Strategies

Individual investors can look for mutual funds that follow a certain investment strategy that the investor prefers, or apply an investment strategy themselves by purchasing shares in funds that fit the criteria of a chosen strategy.

Value Investing

Value investing, popularized by the legendary investor Benjamin Graham in the 1930s, is one of the most well-established, widely used and respected stock market investing strategies. Buying stocks during the Great Depression, Graham was focused on identifying companies with genuine value and whose stock prices were either undervalued or at the very least not overinflated and therefore not easily prone to a dramatic fall.

The classic value investing metric used to identify undervalued stocks is the price-to-book (P/B) ratio. Value investors prefer to see P/B ratios at least below 3, and ideally below 1. However, since the average P/B ratio can vary significantly among sectors and industries, analysts commonly evaluate a company's P/B value in relation to that of similar companies engaged in the same business.

While mutual funds themselves do not technically have P/B ratios, the average weighted P/B ratio for the stocks that a mutual fund holds in its portfolio can be found at various mutual fund information sites, such as There are hundreds, if not thousands, of mutual funds that identify themselves as value funds, or that state in their descriptions that value investing principles guide the fund manager's stock selections.

Value investing goes beyond only considering a company's P/B value. A company's value may exist in the form of having strong cash flows and relatively little debt. Another source of value is in the specific products and services that a company offers, and how they are projected to perform in the marketplace.

Brand name recognition, while not precisely measurable in dollars and cents, represents a potential value for a company, and a point of reference for concluding that the market price of a company's stock is currently undervalued as compared to the true value of the company and its operations. Virtually any advantage a company has over its competitors or within the economy as a whole provides a source of value. Value investors are likely to scrutinize the relative values of the individual stocks that make up a mutual fund's portfolio.

Contrarian Investing

Contrarian investors go against the prevailing market sentiment or trend. A classic example of contrarian investing is selling short, or at least avoiding buying, the stocks of an industry when investment analysts across the board are virtually all projecting above-average gains for companies operating in the specified industry. In short, contrarians often buy what the majority of investors are selling and sell what the majority of investors are buying.

Because contrarian investors typically buy stocks that are out of favor or whose prices have declined, contrarian investing can be seen as similar to value investing. However, contrarian trading strategies tend to be driven more by market sentiment factors than they are by value investing strategies and to rely less on specific fundamental analysis metrics such as the P/B ratio.

Contrarian investing is often misunderstood as consisting of simply selling stocks or funds that are going up and buying stocks or funds that are going down, but that is a misleading oversimplification. Contrarians are often more likely to go against prevailing opinions than to go against prevailing price trends. A contrarian move is to buy into a stock or fund whose price is rising despite the continuous and widespread market opinion that the price should be falling.

There are plenty of mutual funds that can be identified as contrarian funds. Investors can seek out contrarian-style funds to invest in, or they can employ a contrarian mutual fund trading strategy by selecting mutual funds to invest in using contrarian investment principles. Contrarian mutual fund investors seek out mutual funds to invest in that hold the stocks of companies in sectors or industries that are currently out of favor with market analysts, or they look for funds invested in sectors or industries that have underperformed compared to the overall market.

A contrarian's attitude toward a sector that has been underperforming for several years may well be that the protracted period of time over which the sector's stocks have been performing poorly (in relation to the overall market average) only makes it more probable that the sector will soon begin to experience a reversal of fortune to the upside.

Momentum Investing

Momentum investing aims to profit from following strong existing trends. Momentum investing is closely related to a growth investing approach. Metrics considered in evaluating the strength of a mutual fund's price momentum include the weighted average price-earnings to growth (PEG) ratio of the fund's portfolio holdings, or the percentage year-over-year increase in the fund's net asset value (NAV).

Appropriate mutual funds for investors seeking to employ a momentum investing strategy can be identified by fund descriptions where the fund manager clearly states that momentum is a primary factor in his selection of stocks for the fund's portfolio. Investors wishing to follow market momentum through mutual fund investments can analyze the momentum performance of various funds and make fund selections accordingly. A momentum trader may look for funds with accelerating profits over a span of time; for example, funds with NAVs that rose by 3% three years ago, by 5% the following year and by 7% in the most recent year.

Momentum investors may also seek to identify specific sectors or industries that are demonstrating clear evidence of strong momentum. After identifying the strongest industries, they invest in funds that offer the most advantageous exposure to companies engaged in those industries.

The Bottom Line

Benjamin Graham once wrote that making money on investing should depend “on the amount of intelligent effort the investor is willing and able to bring to bear on his task” of security analysis. When it comes to buying a mutual fund, investors must do their homework. In some respects, this is easier than focusing on buying individual securities, but it does add some important other areas to research before buying. Overall, there are many reasons why investing in mutual funds makes sense and a little bit of due diligence can make all the difference—and provide a measure of comfort.

Mutual Funds: How and Why to Invest in Them

Mutual fund investors own shares in a company whose business is buying shares in other companies (or in bonds, or other securities). Mutual fund investors don’t directly own the stock in the companies the fund purchases, but they do share equally in the profits or losses of the fund’s total holdings — hence the “mutual” in mutual funds.

Mutual fund definition

A mutual fund is an investment that pools money from investors to purchase stocks, bonds and other assets. A mutual fund aims to create a more diversified portfolio than the average investor could on their own. Mutual funds have professional fund managers buy securities for you.

» Do your investments need a home? NerdWallet's roundup of the best brokers for mutual funds

How mutual funds work

When you buy into a mutual fund, your investment can increase in value in three ways:

1. Dividend payments

When a fund receives dividends or interest from the securities in its portfolio, it distributes a proportional amount of that income to its investors. When purchasing shares in a mutual fund, you can choose to receive your distributions directly, or have them reinvested in the fund.

2. Capital gains

When a fund sells a security that has gone up in price, this is a capital gain. (And when a fund sells a security that has gone down in price, this is a capital loss.) Most funds distribute any net capital gains to investors annually. In a year with high capital gains payouts, investors may see a large tax bill, especially high-net-worth individuals who will pay higher capital gains tax rates.

3. Net asset value

Mutual fund share purchases are final after the close of market, when the total financial worth of the underlying assets is valued. The price per mutual fund share is known as its net asset value, or NAV. As the value of the fund increases, so does the price to purchase shares in the fund (or the NAV per share). This is similar to when the price of a stock increases — you don’t receive immediate distributions, but the value of your investment is greater, and you would make money should you decide to sell.

Active vs. passive mutual funds

A mutual fund's fees and performance will depend on whether it is actively or passively managed.

Passively managed funds invest to align with a specific benchmark. They try to match the performance of a market index (such as the S&P 500), and therefore typically don’t require management by a professional. That translates into lower overhead for the fund, which means passive mutual funds often carry lower fees than actively managed funds.

Here are two types of mutual funds popular for passive investing:

1. Index funds are made up of stocks or bonds that are listed on a particular index, so the risk aims to mirror the risk of that index, as do the returns. If you own an S&P 500 index fund and you hear that the S&P 500 was up 3% for the day, that means your index fund should be up about that much, too.

2. Exchange-traded funds can be traded like individual stocks, but offer the diversification benefits of mutual funds. In many cases, ETFs will have a lower minimum investment than index funds. ETFs may be more tax-efficient than index funds.

Actively managed funds have a professional manager or management team making decisions about how to invest the fund's money. Often, they try to outperform the market or a benchmark index, but studies have shown passive investing strategies often deliver better returns.

Mutual fund examples

Here are a few funds from our July 2022 list of the best-performing mutual funds:

ClearBridge Sustainability Leaders Fl (LCSTX)

Payson Total Return (PBFDX)

Pax Large Cap Fund Individual Investor (PAXLX)

Johnson Equity Income (JEQIX)

Fidelity Large Cap Core Enhanced Index (FLCEX)

Pear Tree Quality Ordinary (USBOX)

Parnassus Core Equity Investor (PRBLX)

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How to invest in mutual funds

If you're ready to invest in mutual funds, here is our step-by-step guide on how to buy them.

1. Decide whether to go active or passive

Your first choice is perhaps the biggest: Do you want to beat the market or try to mimic it? It's also a fairly easy choice: One approach costs more than the other, often without delivering better results.

Actively managed funds are managed by professionals who research what's out there and buy with an eye toward beating the market. While some fund managers might achieve this in the short term, it has proved difficult to outperform the market over the long term and on a regular basis.

Passive investing is a more hands-off approach and is rising in popularity, thanks in large part to the ease of the process and the results it can deliver. Passive investing often entails fewer fees than active investing.

» Check out the best S&P 500 index funds

2. Calculate your budget

Thinking about your budget in two ways can help determine how to proceed:

How much do mutual funds cost? One appealing thing about mutual funds is that once you meet the minimum investment amount, you can often choose how much money you’d like to invest. Many mutual fund minimums range from $500 to $3,000, though some are in the $100 range and there are a few that have a $0 minimum. So if you choose a fund with a $100 minimum, and you invest that amount, afterward you may be able to opt to contribute as much or as little as you want. If you choose a fund with a $0 minimum, you could invest in a mutual fund for as little as $1.

Aside from the required initial investment, ask yourself how much money you have to comfortably invest and then choose an amount.

Which mutual funds should you invest in? Maybe you’ve decided to invest in mutual funds. But what initial mix of funds is right for you?

Generally speaking, the closer you are to retirement age, the more holdings in conservative investments you may want to have — younger investors typically have more time to ride out riskier assets and the inevitable downturns that happen in the market. One kind of mutual fund takes the guesswork out of the “what's my mix” question: target-date funds, which automatically reallocate your asset mix as you age.

» What’s the right number of funds? Here’s our guide on how many funds to buy

3. Decide where to buy mutual funds

You need a brokerage account when investing in stocks, but you have a few options with mutual funds. If you contribute to an employer-sponsored retirement account, such as a 401(k), there’s a good chance you’re already invested in mutual funds.

You also can buy directly from the company that created the fund, such as Vanguard or BlackRock, but doing so may limit your choice of funds. You can also work with a traditional financial advisor to purchase funds, but it may incur some additional fees.

Most investors opt to buy mutual funds through an online brokerage, many of which offer a broad selection of funds across a range of fund companies. If you go with a broker, you'll want to consider:

Affordability. Mutual fund investors can face two kinds of fees: from their brokerage account (transaction fees) and from the funds themselves (expense ratios and front- and back-end “sales loads”). More on these below.

Fund choices. Workplace retirement plans may carry only a dozen or so mutual funds. You may want more variety than that. Some brokers offer hundreds, even thousands, of no-transaction-fee funds to choose from, as well as other types of funds like ETFs.

Research and educational tools. With more choice comes the need for more thinking and research. It's vital to pick a broker that helps you learn more about a fund before investing your money.

Ease of use. A brokerage's website or app won't be helpful if you can't make heads or tails of it. You want to understand and feel comfortable with the experience.

4. Understand mutual fund fees

Whether you choose active or passive funds, a company will charge an annual fee for fund management and other costs of running the fund, expressed as a percentage of the cash you invest and known as the expense ratio. For example, a fund with a 1% expense ratio will cost you $10 for every $1,000 you invest.

A fund’s expense ratio isn’t always easy to identify upfront (you may have to dig through a fund’s prospectus to find it), but it's well worth the effort to understand, because these fees can eat into your returns over time.

» How do fees impact returns? This mutual fund calculator can help

Mutual funds come in different structures that can impact costs:

Open-end funds: Most mutual funds are this variety, where there is no limit to the number of investors or shares. The NAV per share rises and falls with the value of the fund.

Closed-end funds: These funds have a limited number of shares offered during an initial public offering, much as a company would. There are far fewer closed-end funds on the market compared with open-end funds. A closed-end fund’s trading price is quoted throughout the day on a stock exchange. That price may be higher or lower than the fund’s actual value.

Whether or not funds carry commissions is expressed by “loads,” such as:

Load funds: Mutual funds that pay a sales charge or commission to the broker or salesperson who sold the fund, which is typically passed on to the investor.

No-load funds: Also known as “no-transaction-fee funds,” these mutual funds charge no sales commissions for the purchase or sale of a fund share. This is the best deal for investors, and brokers such as TD Ameritrade and E*TRADE have thousands of choices for no-transaction-fee mutual funds. Most funds available to individual investors are currently no-load.

» Ready to go? Here's our roundup of the best brokers for mutual funds

5. Manage your portfolio

Once you determine the mutual funds you want to buy, you'll want to think about how to manage your investment.

One move would be to rebalance your portfolio once a year, with the goal of keeping it in line with your diversification plan. For example, if one slice of your investments had great gains and now constitutes a bigger share of the pie, you might consider selling off some of the gains and investing in another slice to regain balance.

Sticking to your plan also will keep you from chasing performance. This is a risk for fund investors (and stock pickers) who want to get in on a fund after reading how well it did last year. But "past performance is no guarantee of future performance" is an investing cliche for a reason. It doesn't mean you should just stay put in a fund for life, but chasing performance almost never works out.

Mutual fund types

Beyond the active and passive designations, mutual funds are also divided into other categories. Some mutual funds focus on a single asset class, such as stocks or bonds, while others invest in a variety. These are the main types of mutual funds:

Stock (equity) funds typically carry the greatest risk alongside the greatest potential returns. Fluctuations in the stock market can drastically affect the returns of equity funds. There are several types of equity funds, such as growth funds, income funds and sector funds. Each of these groups tries to maintain a portfolio of stocks with certain characteristics.

Stock (value) funds seek to invest in companies that are determined to be undervalued based on the company's fundamentals.

Blended funds include a mix of value and growth stocks, or those that offer strong earnings growth.

Bond (fixed-income) funds are typically less risky than stock funds. There are many different types of bonds, so you should research each mutual fund individually in order to determine the amount of risk associated with it.

Balanced funds invest in a mix of stocks, bonds and other securities. Balanced funds (also called asset allocation funds or hybrid funds) are often a “fund of funds,” investing in a group of other mutual funds. One popular example is a target-date fund, which automatically chooses and reallocates assets toward safer investments as you approach retirement age.

Money market funds often have the lowest returns because they carry the lowest risk. Money market funds are legally required to invest in high-quality, short-term investments that are issued by the U.S. government or U.S. corporations.

» Learn more: Understand the different types of mutual funds

Can you lose money in mutual funds?

All investments carry some risk, and you potentially can lose money by investing in a mutual fund. But diversification is often inherent in mutual funds, meaning that by investing in one, you’ll spread risk across a number of companies or industries. Investing in individual stocks or other investments, on the other hand, can often carry a higher risk.

Time is a crucial element in building the value of your investments. If you'll need your cash in five years or less, you may not have enough time to ride out the inevitable peaks and valleys of the market to arrive at a gain. If you need your money in two years and the market drops, you may have to take that money out at a loss. Generally speaking, mutual funds — especially equity mutual funds — should be considered a long-term investment.

Mutual fund pros and cons

Still trying to decide if mutual funds are for you? Here are the pros and cons.

Pros

These are the primary benefits to investing in mutual funds:

Simplicity. Once you find a mutual fund with a good record, you have a relatively small role to play: Let the fund managers (or the benchmark index, in the case of index funds) do all the heavy lifting.

Professional management. Active fund managers make daily decisions on buying and selling the securities held in the fund — decisions that are based on the fund's goals. For example, in a fund whose goal is high growth, the manager might try to achieve better returns than that of a major stock market like the S&P 500. Conversely, a bond fund manager tries to get the highest returns with the lowest risk. If you’re interested in (and willing to pay for) professional management, mutual funds offer that.

Affordability. Mutual funds often have a required minimum from $500 to $3,000, but several brokers offer funds with lower minimums, or no minimum at all.

Liquidity. Compared with other assets you own (such as your car or home), mutual funds are easier to buy and sell.

Diversification. This is one of the most important principles of investing. If a single company fails, and all your money was invested in that one company, then you have lost your money. However, if a single company within a mutual fund fails, your loss is constrained. Mutual funds provide access to a diversified investment without the difficulties of having to purchase and monitor dozens of assets yourself.

Cons

Here are the major cons of mutual funds:

Fees. The main disadvantage to mutual funds is that you’ll incur fees no matter how the fund performs. However, these fees are much lower on passively managed funds than actively managed funds.

Lack of control. You may not know the exact makeup of the fund’s portfolio and have no say over its purchases. However, this can be a relief to some investors who simply don’t have the time to track and manage a large portfolio.

Mutual funds vs. ETFs vs. stocks

With so many different types of investments out there, it can be difficult to choose which ones are right for you. Here is a quick comparison between three of the most popular types of investments.

Exchange-traded funds (ETFs) Mutual funds Stocks Cost to invest Varies. The median price of the most popular ETFs is $59.41. Varies. The median price of some of Morningstar’s top-ranked mutual funds is $90.88. Varies. The median share price of companies listed on the S&P 500 is $117.78. Fees Average expense ratio: 0.19%. Average expense ratio: 0.50%, plus any additional fees. Commission fee: Often $0, but can be as high as $5. How to buy Traded during regular market hours and extended hours. At the end of the trading day after markets close. Traded during regular market hours and extended hours.

Security information is supplied by a variety of sources. Data is current as of Dec. 23rd, 2021.

Tutorial: How do I buy a mutual fund?

Follow this step-by-step tutorial to learn how to buy a mutual fund at Vanguard

Step 1

This example is for illustrative purposes only and is not a recommendation to buy or sell a particular security.

Brokerage assets are held by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC.

To buy a Vanguard mutual fund from your Account overview page, first select the Holdings tab.

From the Holdings tab, find the Transact drop down menu. Select Buy Vanguard funds to begin you order.

Step 2

On the Buy Vanguard funds page, select the appropriate account under Where’s the money going?

If you are adding money to a fund you already own, check the box next to the fund and type in the dollar amount.

If you are buying a new fund, check the box next to Add another Vanguard mutual fund. You can type in the fund name, symbol, or number. You can also view a list of Vanguard mutual funds and select one from the list.

Step 3

Enter the dollar amount of the fund you’d like to purchase. Click CONTINUE.

Step 4

Under Where's the money coming from?, choose the account you’d like to use to make your purchase.

Step 5

Review the Consent to electronic delivery of fund prospectus. You must click ACCEPT in order to submit your fund purchase.

Step 6

Review your purchase details and click the SUBMIT button.