Money glossary
Mutual Fund
A mutual fund pools money from many investors to buy a portfolio of stocks, bonds, or other investments that a professional manages.
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What is a mutual fund?
A mutual fund is an investment where you and many other people pool your money, a professional manager invests it in stocks, bonds, or other assets, and everyone shares the gains or losses in proportion to what they put in.
Quick take:
- You pool money with other investors to buy a basket of investments together
- A manager decides what to buy and handles the work
- One purchase can spread your money across hundreds of companies
- You can sell your shares back to the fund on any business day
- Mutual funds are not FDIC insured, so you can lose money
How it works
Say you have $200 to invest. If you buy a single company's stock, all of your money rides on that one company. If it drops 30%, your whole $200 drops 30%.
If you put that $200 into a fund that owns hundreds of companies instead, you own a tiny slice of all of them. One company having a bad year only moves your balance a little, because it's a small part of the whole.
- You put money in. It could be $50 or $5,000, depending on the fund's minimum.
- The manager invests the pool. Everyone's money buys the fund's holdings.
- You own a slice of everything. If the fund holds 500 companies, you own a small piece of all 500.
- You share the results. When the fund gains, you gain. When it loses, you lose. Mutual fund shares are priced once a day, after the market closes.
The two types that matter most
Index funds
An index fund doesn't try to be clever. It copies a list of companies, called an index, like the S&P 500, and holds them in the same proportions. No stock picking and no guessing, so costs tend to be low.
Actively managed funds
An actively managed fund has a manager picking investments to try to beat the market. That research costs money, so these funds usually charge higher fees. Many don't beat their benchmark index after those fees, which is why so many beginners start with index funds.
Why fees matter
Every fund charges an annual fee called an expense ratio. The difference between a low fee and a high one might look tiny, but it comes out of your balance every year and compounds over decades. Always check the expense ratio before you buy.
How you make money
- Dividends and interest. Companies pay dividends and bonds pay interest. The fund passes most of that to you, and many people reinvest it automatically to buy more shares.
- Capital gains distributions. When the fund sells an investment for more than it paid, it passes the profit to shareholders.
- A higher share price. If the fund's holdings grow in value, your shares are worth more. For example, if you buy 100 shares at $50 ($5,000) and they rise to $55, your shares are worth $5,500.
Mutual funds vs ETFs
| Feature | Mutual funds | ETFs |
|---|---|---|
| When you trade | Once per day, at the price set after market close | Any time the market is open |
| Minimum investment | Set by the fund, sometimes $0, sometimes thousands | The price of one share, or less with fractional shares |
| Where you'll see them | Very common in 401(k) plans | Common in brokerage accounts and IRAs |
Both can hold the same investments. If you're investing through a 401(k), you'll most likely be choosing from mutual funds.
How to start
- Check your 401(k). If your employer offers a match, that's free money. Try the 401(k) match calculator to see what you'd be leaving on the table.
- Open a brokerage account if you don't have a 401(k) or want to invest more.
- Pick one broad fund. A low-cost index fund or a target date fund for your retirement year keeps it simple.
- Automate it. Set up a recurring contribution. That's automatic investing, and it means you buy more shares when prices are low and fewer when they're high.
- Leave it alone. Panic-selling during a market drop is one of the most expensive mistakes you can make.
Frequently asked questions
How much money do I need to start?
It depends on the fund. Some have $0 minimums and others require a few thousand dollars. Through a 401(k), you can usually start with whatever percentage of your paycheck you choose.
Can I lose all my money?
In a broadly diversified fund, it's extremely unlikely, because every company in the fund would have to fail. The realistic risk is a big temporary drop during a market downturn, which is why mutual funds are meant for long-term money.
Are mutual funds safe?
A diversified fund spreads your risk across many companies, but it's not risk-free and it's not FDIC insured like a bank account. Its value goes up and down with the market.
When can I take my money out?
Any business day. Your sale is processed at that day's closing price. Some funds charge a redemption fee if you sell soon after buying, so check the fund's rules.
Do I have to pay taxes?
In a regular brokerage account, yes: on dividends and interest, on capital gains the fund distributes, and on your own profit when you sell. Inside a 401(k) or IRA, those taxes are deferred, or avoided entirely on qualified Roth withdrawals.
How many funds should I own?
When you're starting, one broad index fund or target date fund is enough. Owning several funds that hold the same companies doesn't make you more diversified.
To see how your fund's growth looks after inflation, read about real returns, or dig deeper with the investable assets guide.
Your next step
Same numbers, different next move
Knowing the word is step one. Two people can read the same definition and need totally different first moves. Your Money Type tells you yours.
