Mutual fund: pooling your money with thousands of other investors
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Key takeaways
A mutual fund is an SEC-registered investment company that pools money from many investors into stocks, bonds, or a combination of both.
Funds are broadly split into actively managed (aiming to beat a benchmark) and index funds (aiming to match one, typically at lower cost).
Every mutual fund charges fees, and even a small difference in expense ratio compounds meaningfully over a long holding period.
A fund holding foreign stocks or bonds carries currency exposure on top of the underlying securities’ own performance.
Reading the fund’s prospectus reveals its objective, fees, and whether currency exposure on international holdings is hedged.
A mutual fund pools money from many investors into a diversified, professionally managed portfolio. Here’s how it works, and what to know as a first-time investor.
What is a mutual fund?
According to Investor.gov(opens in new window), a mutual fund is an SEC-registered investment company that pools money from many investors and invests it in stocks, bonds, short-term money-market instruments, or some combination of these, managed by a registered investment adviser. Each mutual fund share represents part ownership of the fund’s overall portfolio, along with a proportional share of the gains and losses that portfolio generates.
How mutual funds work
Rather than researching and buying individual stocks or bonds directly, a mutual fund provides access to a professionally managed, already diversified portfolio through a single purchase. Investor.gov identifies professional management, diversification, and relatively low minimum investment requirements as some of the key features that make mutual funds a popular choice, particularly for investors who don’t have the time, expertise, or desire to select individual securities themselves.
Mutual funds generally fall into a few main categories. Stock funds, sometimes called equity funds, invest primarily in company shares and tend to be more volatile in the short term, with their performance closely tied to how the underlying companies perform. Bond funds, or income funds, invest primarily in bonds or other debt securities, generally offering more stability but typically lower long-term growth potential than stock funds. Some funds combine both, and target date funds automatically shift their mix toward a more conservative allocation as a specific future date, often a retirement year, approaches.
Actively managed funds versus index funds
Mutual funds are also generally categorized by their management approach. An actively managed fund employs a manager who makes ongoing decisions about which specific securities to buy and sell, aiming to outperform a chosen benchmark, though its actual performance depends heavily on that manager’s skill and can vary considerably from year to year. An index fund, by contrast, follows a passive strategy, aiming to match the performance of a specific market index rather than trying to beat it, which typically results in less frequent trading and, often, lower fees than an actively managed alternative. Neither approach is universally superior, and understanding the difference clarifies what’s actually being paid for and what’s reasonable to expect from a specific fund.
Why mutual fund fees matter more than they seem
Every mutual fund charges fees and expenses, disclosed in its prospectus under a section called annual fund operating expenses, and these costs directly reduce the actual return, since they’re deducted from the fund’s assets regardless of how the fund performs in a given year. Even a seemingly small difference in annual expenses can compound into a substantial difference in total returns over a long holding period, since higher fees mean less money is actually working and growing. Comparing the expense ratios of similar funds before investing, rather than focusing only on past performance, is one of the more reliable ways to improve the likely long-term outcome.
Mutual funds for immigrants investing for the first time
For someone investing in the U.S. for the first time, a mutual fund often provides a more approachable entry point than picking individual stocks, since the built-in diversification reduces the impact of any single company performing poorly. Reviewing the differences between an ETF and a mutual fund(opens in new window) is a useful next step, since exchange-traded funds share many of the diversification benefits of mutual funds but trade differently throughout the day and sometimes carry different tax and fee structures worth understanding before choosing between them.
Currency risk note
A mutual fund that invests in foreign stocks or bonds carries currency exposure layered on top of the fund’s own investment performance, since the value of those foreign holdings, once converted back to the fund’s own reporting currency, moves with exchange rates in addition to the underlying securities’ own price changes. Some international funds specifically hedge this currency exposure, aiming to reduce the effect of currency movement, while others leave it unhedged, meaning currency swings directly affect returns alongside the fund’s investment performance. Checking a specific international fund’s approach to currency hedging, disclosed in its prospectus, clarifies exactly what kind of exposure is being taken on.
What to check before choosing a mutual fund
Read the fund’s prospectus or summary prospectus. This document discloses the fund’s investment objective, strategy, fees, and historical performance in one place.
Compare the expense ratio against similar funds. Even a modest difference compounds meaningfully over a long holding period.
Understand whether the fund is actively managed or an index fund. This affects both the fee structure and what kind of performance is realistic to expect.
Check whether an international fund hedges currency exposure. This clarifies how much of the return depends on currency movement versus the underlying investments themselves.
Understanding a mutual fund’s specific share classes
Some mutual funds offer more than one share class of the same underlying fund, and these classes can carry meaningfully different fee structures despite investing in the identical portfolio. A front-load class charges a fee at the time of purchase, reducing the amount actually invested from day one. A back-end load, or deferred sales charge, instead charges a fee for selling within a certain period, often declining the longer the fund is held. A no-load class avoids these specific sales charges entirely, though it may still carry its own ongoing expense ratio. Checking which specific share class is being offered, and comparing it against other available classes of the same fund where possible, can meaningfully affect total cost, particularly when investing a substantial amount or holding the fund for a long period.
Common questions about mutual funds
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How is a mutual fund different from simply buying stocks directly?
A mutual fund provides instant diversification across many securities through a single purchase, professionally managed, whereas buying individual stocks directly requires researching and managing each holding independently, and typically results in less diversification unless a very large number of different stocks are purchased.
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When can mutual fund shares be bought or sold?
Mutual fund shares are typically bought and sold once per day, at the fund’s net asset value calculated after the market closes, unlike a stock or an ETF, which can be traded throughout the day at a fluctuating price.
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Are mutual funds a safe investment?
Like any investment involving stocks or bonds, a mutual fund carries risk and can lose value, including the possibility of losing money invested. Diversification within the fund reduces, but doesn’t eliminate, this risk, since the broader market or a specific sector the fund is concentrated in can still decline overall.
In Summary
A mutual fund offers professionally managed diversification through a single investment, making it a popular entry point for investors who don’t want to select individual securities themselves. For anyone considering a fund with international holdings, understanding whether currency exposure is hedged or not gives a clearer picture of what’s actually driving returns.
This publication is provided for general information purposes only and is not intended to cover all aspects of the topics discussed herein. This publication is not a substitute for seeking advice from an applicable specialist or professional. The content in this publication does not constitute legal, tax, or other professional advice from Remitly or any of its affiliates and should not be relied upon as such. While we strive to keep our posts up to date and accurate, we cannot represent, warrant, or otherwise guarantee that the content is accurate, complete, or up to date.