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.
2. Fidelity Total Market Index Fund (FSKAX)
The Fidelity Total Market Index Fund (FSKAX -0.04%) 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 3% 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 12.90%.
3. Schwab 1000 Index Fund (SNXFX)
The Schwab 1000 Index Fund (SNXFX +0.00%) 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 2.97% 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 13.20% annualized return.
4. Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
For low-cost international diversification, the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX -0.25%) 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 6.27% 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)
For investors looking for one fund that covers the entire global stock market, the Vanguard Total World Stock Index Fund Admiral Shares (VTWAX -0.12%) 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.
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.
