Mutual Fund

A mutual fund pools investor money to buy a managed basket of securities, priced once daily after the market closes.

A quick example

How to apply it

If you buy mutual funds, check the expense ratio and the manager’s long-term record against its benchmark. For most investors, a low-cost index ETF delivers the same diversification for a fraction of the fee.

What it means for you

It is the classic hands-off way to own many stocks through one purchase.

Picture this

A retiree buys an actively managed mutual fund charging 1.2% a year, believing the manager’s 20-year record justifies the fee. An identical-looking index fund costs 0.06%. Over 25 years, on a $200,000 starting balance, the fee difference compounds into more than $150,000 of extra ending value for the index version — and the active fund’s after-fee performance, like most, trails its benchmark. The scenario is the everyday version of the fee debate: costs are the one variable you control completely.

Common mix-ups

It trades only once a day and usually costs more than an equivalent ETF.

Key takeaway

A mutual fund is a professionally managed pool priced once a day, and its main drawbacks are the higher fee and the lack of intraday trading. The manager may or may not beat a cheap index fund, and the record says most do not once costs are counted. Check the expense ratio and the manager’s long-term performance against the right benchmark before paying for active management. For most investors, a low-cost index ETF delivers the same diversification for a fraction of the fee.

Definitions reviewed by the Investing Glossary editorial team.