Mutual Fund Calculator

A mutual fund is an investment company that pools money from many people to buy a portfolio of securities. Each investor owns shares in the fund, and so owns a small slice of everything it holds. Funds can focus on stocks, bonds, money markets or a mix. They provide instant diversification and professional management, for a fee that varies widely from fund to fund.

You buy shares directly from the fund or through a broker at the day's net asset value, calculated after the market closes. The manager, or an index rule, decides what the fund holds. You earn money through dividends, capital gain distributions and a rising share price. Orders are filled once a day, unlike stocks and ETFs, which trade all day.

The fund's holdings produce returns for investors through dividends, interest and rising prices. The company running the fund earns its money from fees, mainly the expense ratio, charged as a percentage of your investment each year. Some funds also charge sales loads, which often go to brokers. You pay these whether the fund goes up or down, so low fees give you a head start.

Judge a fund against its benchmark and category, not a fixed number. A US large-company stock fund should be compared with an index such as the S&P 500, and a bond fund with a bond index. A good return beats or roughly matches that benchmark after fees, over many years. Many funds fall short over long periods, especially after costs.

It's the yearly fee, expressed as a percentage of your investment. A 0.50% ratio costs $50 a year on $10,000, and it comes out of the fund's assets, so you never see a bill. Index funds tend to charge very little, and active funds usually charge more. As the table above shows, a seemingly small difference can cost tens of thousands of dollars over decades.

Both hold baskets of investments. ETFs trade on an exchange all day like a stock, often with no minimum beyond one share. Mutual funds trade once a day at NAV, and may require a minimum investment. ETFs are often more tax efficient in taxable accounts. Mutual funds usually make automatic recurring purchases easier. Either kind can be active or indexed, and fees vary.

An index fund is a type of mutual fund or ETF that simply tracks a market index, and it usually costs little. Other mutual funds are actively managed, meaning a manager chooses investments to try to beat the market. Over long periods, most active funds trail comparable index funds after fees. Compare the two kinds with our index fund calculator.

In a taxable account, yes, you can owe tax on dividends and on capital gains the fund distributes each year, even if you reinvest them or never sold a share. You also owe tax on any gain when you sell. Inside an IRA or 401(k), these aren't taxed each year. Your fund and broker will send a Form 1099-DIV showing what to report.

There's no general tax-free allowance in the US, but some income falls into the 0% federal bracket for long-term gains and qualified dividends, depending on your taxable income. Municipal bond funds pay interest that's generally free of federal income tax. Holding funds in a Roth IRA can make qualified withdrawals tax free. The IRS sets these thresholds each year, so check the current figures.

You can buy through most online brokerages, directly from fund companies such as Vanguard or Fidelity, or through a workplace plan such as a 401(k). Before buying, check for transaction fees, which some brokers charge on funds they don't favor, and read the fund's summary prospectus. It lists fees, holdings and risks in a few pages.

They carry the risk of whatever they hold. A broad stock fund can fall sharply in a bear market, even though it spreads risk across many companies. A money market fund is very low risk, but it isn't FDIC insured. Check what the fund holds, how much it fell in past downturns, and whether that fits how long you can leave the money invested.