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)
NASDAQMUTFUND: FXAIX
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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)
NASDAQMUTFUND: VTIAX
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NASDAQMUTFUND: VTWAX
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For investors looking for one fund that covers the entire global stock market, the Vanguard Total World Stock Index Fund Admiral Shares (VTWAX +0.83%) is an excellent choice. It tracks the FTSE Global All Cap Index, providing exposure to more than 9,800 stocks in the U.S., developed, and emerging markets, as well as overseas, all in a single package.
Like many passive index funds, this Vanguard fund is designed to be tax-efficient, with a low 2.8% turnover rate, which helps minimize taxable distributions. The expense ratio of just 0.09% also keeps costs low, making it one of the most affordable global stock funds available.
Over the past five years, this index fund has delivered an annualized return of 14.47%, benefiting from strong U.S. market performance while still providing broad international diversification. However, like most Vanguard Admiral Shares funds, it requires a $3,000 minimum investment, which may be a barrier for some investors.
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.
