A mutual fund is a pooled investment vehicle where many investors’ money is combined and managed by a professional fund manager who buys and sells securities on behalf of the fund. It’s one of the most common investment vehicles in 401ks and IRAs — and it differs from ETFs in several important ways.
How mutual funds work
When you invest in a mutual fund, you’re buying shares of the fund — not shares of the individual stocks inside it. The fund manager makes all the investment decisions. At the end of each trading day, the fund calculates its Net Asset Value (NAV) and all buy/sell orders are processed at that price.
Active vs passive mutual funds
Actively managed mutual funds have a manager trying to beat the market — selecting stocks they believe will outperform. Passively managed index funds simply track a market index (like the S&P 500) without trying to beat it. Decades of data show that most active managers fail to beat their index benchmark over time, while charging significantly higher fees.
Mutual funds vs ETFs: key differences
Trading: ETFs trade throughout the day like stocks; mutual funds only price once per day at market close. Minimums: many mutual funds have minimum investments ($1,000–$3,000); most ETFs have no minimum beyond one share. Taxes: ETFs are generally more tax-efficient. Fees: both can be cheap if you choose index funds — expense ratios under 0.10% are available for both.
When mutual funds make more sense
Mutual funds are preferable in some situations: automatic investment of exact dollar amounts (ETFs require buying whole shares unless you have fractional share access), automatic reinvestment of dividends, and simplicity within 401k plans where ETFs often aren’t available. In a 401k, you’ll almost always be choosing between mutual funds.