Mutual Funds

A Mutual Fund is an investment that pools money from hundreds or thousands of investors to buy a giant collection of stocks, bonds, or other assets. A professional manager or a computer then oversees that "pool" to make sure it follows a specific goal.

How a Mutual Fund Works

Think of a Mutual Fund like a Potluck Dinner.

  • Everyone brings a little bit of money to the table.

  • The "Chef" (the Fund Manager) uses all that money to buy a massive feast of different investments.

  • Because you contributed to the potluck, you own a tiny slice of everything on the table.

Essential Facts

Review these four points to see how Mutual Funds differ from the ETFs you’ve already learned about:

1. Trading Once a Day

Unlike stocks or ETFs, which you can buy and sell all day long, Mutual Funds only trade once per day. When you put in an order to buy or sell, it doesn't happen instantly. It happens after the stock market closes (usually 4:00 PM EST), and everyone gets the exact same price.

2. Minimum Initial Investments

This is the biggest hurdle for young investors. While you can buy an ETF for $1, many Mutual Funds require a "Minimum Initial Investment." This could be $1,000, $3,000, or even more just to open the door. However, once the account is open, you can usually add smaller amounts (like $50) later.

3. Actively Managed vs. Index Funds

  • Active Mutual Funds: A human "Stock Picker" tries to beat the market by choosing the best companies. These are more expensive because you have to pay the manager's salary.

  • Index Mutual Funds: These are the "Mutual Fund version" of an index tracker. They just follow a list (like the S&P 500) and are much cheaper.

4. Automatic Investing

The "superpower" of Mutual Funds is that they are built for automation. Most brokerages allow you to set up a rule that says: "Every Friday, take $25 from my bank and buy this Mutual Fund." It is very easy to "set it and forget it."

Feature Mutual Fund ETF (Exchange-Traded Fund)
Trading Style Trades only once per day after the market closes. Trades all day long, just like a regular stock.
Pricing Everyone who buys today gets the same price at 4:00 PM. The price changes every second based on supply and demand.
Minimums Often requires a high initial amount (e.g., $1,000+). Can be bought for the price of a single share (or less).
Automation Very easy to set up automatic weekly or monthly buys. Sometimes requires you to manually "click buy" each time.
Fees & Taxes Generally higher fees and potentially more tax events. Generally lower fees and more tax-efficient.

Which One Should You Choose?

Choosing between a Mutual Fund and an ETF usually depends on your personal style:

  • Choose a Mutual Fund if: You want to set up an automatic plan where money is taken from your bank account every month and invested without you having to think about it. It is great for long-term, "hands-off" savers who have enough money to meet the starting minimum.

  • Choose an ETF if: You are starting with a smaller amount of money or you want the flexibility to buy and sell at specific prices during the day. ETFs are often the choice for investors who want the lowest possible fees and maximum control.