What are mutual funds?

Mutual funds are a type of investment that groups together various assets. These assets can include stocks, bonds, money market instruments, and more.

Money managers manage mutual funds to maximize investor returns. Investors like mutual funds because they give access to a diversified portfolio and their performance is closely tracked by fund managers.

To optimize diversification, mutual funds group many assets together, making these investments less risky. Experts recommend that all investors invest in mutual funds. Mutual funds are low-risk investments and are likely to provide significant returns.

How do mutual funds work?

Like other investment vehicles, investors can buy and sell mutual fund shares. When you invest in a mutual fund, you invest in the portfolio of companies and the money managerโ€™s abilities.

Money managers decide the mutual fundโ€™s assets to maximize shareholder returns. Money managers can have different strategies and goals they believe will boost returns. These money managers are bound by law to work in the best interest of the fundโ€™s shareholders.

Larger investment companies manage many mutual funds. For instance, you can buy mutual fund shares at Fidelity, Vanguard, and Oppenheimer.

What is the difference between a mutual fund and an ETF?

Mutual funds and ETFs are like siblings. They act very similar but have a few key differences.

Mutual funds have been around a lot longer than ETFs. The first modern mutual fund was from 1924 in the U.S., but investors didnโ€™t begin trading ETFs until 1993. Money managers manage mutual funds, whereas ETFs track various stocks. Because mutual funds are managed hands-on, they are considered more valuable.

Having a money manager is like hiring a personal trainer for workouts. Like personal trainers, money managers track the portfolioโ€™s performance and make adjustments. Both options offer diversified investment opportunities. However, mutual funds provide a bit more strategy for investors.

Because investors consider mutual funds more valuable, they pose a few more obstacles. Stockbrokers often make investors buy a certain amount of mutual fund shares. But, this is not the case when investors buy shares of ETFs.

Sometimes, mutual funds are cheaper to buy from the money manager. This is because a stockbroker may apply extra fees to mutual fund investments.

Where can I buy mutual funds?

You can buy mutual fund shares from most stockbrokers. Many stockbrokers, like ETrade, Fidelity, TD Ameritrade, and Robinhood, are available online. You can also buy mutual money shares from the money manager. Buying from a mutual fund manager can help you avoid brokerage fees.

Many stockbrokers offer counseling, educational resources, and other tools to help you. Investors suggest picking a stockbroker that offers low trading fees and analytical tools.

What mutual fund should I invest in?

Like stocks and index funds, choosing a mutual fund to invest in will depend on personal factors. These can include:

  • Investment amount
  • Tolerance for risk
  • Financial goals

Mutual funds can focus on specific sectors or strategies to choose companies. For instance, some mutual funds focus only on technology companies. Others focus on other criteria, like the top-valued companies.

Some of the top mutual funds include:

Vanguard Total Stock Market Index Fund (VSMPX)

This fund tracks the performance of the total stock market. Investors choose this fund because it is an opportunity to invest in many companies at once.

Fidelity 500 Index Fund (FXAIX)

This mutual fund corresponds with the S&P 500 and has at least 80% of its assets in common stock.

JPMorgan US Government Money Market Fund (OGVXX)

This mutual fund focuses on securities guaranteed by the U.S. government. This includes dollars, bonds, treasury notes, and more.

When are mutual funds taxable?

Like stocks, most investors will typically only pay taxes on mutual funds when selling or earning dividends. When you sell shares in a mutual fund, you will pay taxes on your profits. If you bought $20,000 in mutual fund shares in 2019 and sold it for $25,000 today, you would likely only pay taxes on the $5,000 profit this year.