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Understanding mutual funds

Mutual funds are an affordable way to help diversify your portfolio.

On this page:

What is a mutual fund?

Mutual funds let you pool your money with other investors to "mutually" buy stocks, bonds, and other investments.

  • They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them.
  • You get exposure to all the investments in the fund and any income they generate.
  • They offer a wide variety of investment strategies and styles.

Why invest in mutual funds?

  • Diversification icon

    Diversification

    Mutual funds let you access a wide mix of asset classes, including domestic and international stocks, bonds, and commodities. 

  • Low Cost icon

    Low costs

    Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are typically lower than what you would pay as an individual investor.

  • Convenience icon

    Convenience

    Buying mutual funds can be straightforward. Many banks and brokerage firms, including Schwab, have their own line of proprietary mutual funds as well as access to thousands of third-party funds.

  • ProManagement icon

    Professional management

    You get the benefit of having a professional manager reviewing and researching the fund's portfolio on an ongoing basis.

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What is the difference between active and index mutual funds?

  • Actively managed funds

    These funds typically strive to beat the market. They're overseen by portfolio managers who select securities they think will outperform benchmarks. As such, actively managed funds are usually more expensive.

  • Index funds

    These funds, known as index funds, are designed to track—rather than beat—a specific index, such as the S&P 500®. They can be a low-cost way to invest.

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How do mutual funds and ETFs compare?

Both mutual funds and exchange-traded funds (ETFs) pool money from many investors and invest that money in securities. Likewise, many investors own a mix of these funds. Before you decide what's right for you, there are things to consider.

  • Scale icon

    How they're most similar

    Both generally provide broad, diversified exposure to an asset class, region, or a specific market niche.

  • Scale icon

    A key difference

    Mutual fund trades are executed once a day, at a single price. ETFs are exchange-traded and can be bought and sold intraday at different prices.

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What fees and costs are associated with mutual funds?

Investing costs can be a key factor in your net return. It's important to understand how mutual funds assess fees and expenses. These fall into three broad categories:

  • Operating expense ratio (OER)

    OERs cover the fund's operating expenses and are annually factored into the total return you receive.

  • Load

    A load is a one-time commission some fund companies charge whenever you buy or sell shares in certain load-based mutual funds.

  • Transaction fee

    Brokerage firms may charge a trading fee whenever you buy or sell mutual fund shares.

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What types of mutual funds are there?

  • Common mutual funds

    These funds aim to meet the fund's objectives by investing in traditional assets (equities, fixed income, and/or cash) using traditional strategies (fundamental relative value, indexing, etc.). A large majority of funds fall into this category.

  • Specialty mutual funds

    These funds aim to meet the fund's objectives through non-traditional investments and trading strategies, such as investing in commodities, or making investments based on environmental or social governance guidelines.

Explore Mutual Fund Types

Next steps

  • Explore mutual funds at Schwab.

    Find 4,000+ no-load, no transaction fee mutual funds from Schwab Asset Management™ and other fund companies.

    Mutual funds at Schwab

  • Choose mutual funds with our help.

    Get the expertise to build a strong mutual fund portfolio on your terms.

    Choosing mutual funds

  • Simplify with our all-in-one solutions.

    Choose the mutual fund according to your investing goal, then we do the rest.

    View all-in-one solutions

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