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, with $25.5 trillion in assets under management (AUM) in 2023, according to Statista.
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.
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.