Mutual funds are pooled investment vehicles that collect money from many investors and invest it in a diversified portfolio of stocks, bonds, or other assets.
Despite the rise of exchange-traded funds (ETFs), mutual funds remain a staple investment option. These funds continue to play a key role in retirement planning, particularly in workplace plans such as 401(k)s, where they remain a cornerstone of long-term investing.
Mutual funds run the gamut from tracking stock market indexes to following specific sectors, such as real estate, technology, or even cryptocurrency.
However, like any other investment product, there are both good and bad mutual funds. Understanding how they work, how to invest in them, their advantages, and potential drawbacks is essential for investors looking to make informed financial decisions.
How do mutual funds work?
Mutual funds pool money from many investors and use that capital to buy a diversified portfolio of stocks, bonds, or other securities.
When you invest, you are buying units of the fund rather than individual assets. Each unit is priced based on the fund’s net asset value (NAV), which represents the total value of all underlying holdings divided by the number of units outstanding.
Unlike ETFs, which trade throughout the day, mutual fund transactions settle once per day after the market closes, when the NAV is calculated. Buy and sell orders submitted during the day are all executed at that end-of-day NAV.
Mutual funds operate under strict regulatory frameworks, which in the U.S. is primarily the Investment Company Act of 1940. This governs liquidity rules, diversification requirements, disclosure, and how funds must treat unitholders.
For investors, this means the experience is straightforward: you invest through a brokerage or directly with the fund company, you receive periodic distributions, and the fund company handles all trading, rebalancing, and administrative work on your behalf.
Six top mutual funds for 2025
With thousands of mutual funds on the market, narrowing down the best options can be overwhelming. To help, we've selected six top mutual funds for 2025 based on key factors that make them attractive for long-term investors. Each fund on this list has been chosen for its low investment minimums, low expense ratios, long track record, high diversification, and strong historical performance.
1. Fidelity 500 Index Fund (FXAIX)
The Fidelity 500 Index Fund (NASDAQMUTFUND:FXAIX) is one of the best low-cost mutual funds for broad market exposure. Launched in 1988, this fund tracks the S&P 500 index, offering investors a simple, diversified way to invest in America's largest companies.
One of this fund's biggest advantages is its extremely low expense ratio of just 0.015%, making it one of the cheapest index funds available. It also has no minimum investment requirement, allowing investors of all levels to participate.
Another reason to like this Fidelity fund is its tax efficiency, thanks to its low 2% turnover rate, which means it rarely buys and sells stocks, which helps to reduce taxable capital gains distributions. Over the last 10 years, the fund has delivered an annualized return of 14.62%.
2. Fidelity Total Market Index Fund (FSKAX)
The Fidelity Total Market Index Fund (NASDAQMUTFUND:FSKAX) is a low-cost, highly diversified index fund designed to give investors exposure to the entire U.S. stock market. Launched in 1997, this fund tracks the Dow Jones U.S. Total Stock Market Index, making it a broader alternative to S&P 500-only funds.
Like the Fidelity 500 Index Fund, this Fidelity fund comes with a rock-bottom expense ratio of just 0.015% and has no minimum investment requirement, making it accessible to all investors. It's also tax-efficient, with a low 2% turnover rate, helping to minimize taxable capital gains distributions.
The key difference between this fund and the Fidelity S&P 500 fund is that this total market fund includes thousands of mid- and small-cap stocks, providing broader diversification beyond the largest U.S. companies. Despite this broader exposure, it has still delivered a strong 10-year annualized return of 14.04%.
3. Schwab 1000 Index Fund (SNXFX)
The Schwab 1000 Index Fund (NASDAQMUTFUND:SNXFX) is a straightforward, low-cost mutual fund that provides exposure to the 1,000 largest U.S. stocks, weighted by market capitalization. With coverage of roughly 90% of the total U.S. stock market, this Schwab fund provides broader diversification than S&P 500-only funds while maintaining the stability of larger, well-established companies.
The fund is also tax-efficient, with a 3.14% turnover rate, meaning minimal capital gains distributions. It comes with a low expense ratio of 0.05% and no minimum investment requirements, making it an affordable option. Over the last 10 years, this mutual fund has delivered a 14.22% annualized return.
4. Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
NASDAQMUTFUND: VTIAX
Key Data Points
For low-cost international diversification, the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX +1.08%) is one of the best options available. This mutual fund tracks the FTSE Global All Cap ex US Index, covering more than 8,500 stocks from both developed and emerging markets.
Like many Vanguard index funds, this one is fairly tax-efficient, with a 3.4% turnover rate, reducing capital gains distributions. It requires a $3,000 minimum investment, which may be an issue for smaller investors. However, it charges a reasonably low 0.09% expense ratio.
Over the last 10 years, this Vanguard fund has delivered a 7.83% annualized return -- a lower figure compared to U.S. stocks, as international markets have historically lagged. Still, for those looking to balance their portfolio with global exposure, this fund remains a strong long-term option.
5. Vanguard Total World Stock Index Fund Admiral Shares (VTWAX)
6. Vanguard Wellington Fund Investor Shares (VWELX)
Potential benefits of mutual funds:
- Access to professional portfolio management without the need to pick individual securities
- Built-in diversification, spreading risk across many holdings in one fund
- Automatic dividend reinvestment to compound returns over time
- Lower trading costs for long-term investors, since there's no need for frequent buying or selling
- Wide range of investment strategies, from conservative bond funds to aggressive stock funds
Potential risks of mutual funds:
- Higher expense ratios compared to ETFs, which can erode returns over time
- Less tax efficiency because capital gains are distributed annually, even if you didn't sell shares
- Limited trading flexibility since mutual funds are priced only once per day after markets close
In most cases, ETFs provide similar market exposure with added benefits, including intraday trading flexibility, lower expense ratios, and better tax efficiency. For investors who prioritize cost and flexibility, ETFs are often the better choice.
