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Types of Investments

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Types of Investments

Creating a diversified portfolio takes all kinds of investments. By understanding what’s available, you can decide which ones work for you.

Need help? Call 800-435-4000 anytime.


What is a Mutual Fund?

What is a mutual fund?

Mutual funds pool money from many investors to purchase a broad range of investments, such as stocks, bonds, cash, or other types of securities. They’re an efficient way to begin investing and building a portfolio.

How a mutual fund works

Mutual funds can be an efficient, cost-effective way to invest. When you make an investment in a fund, you purchase shares of the fund, which means you own a portion of all of the underlying investments. A mutual fund can help provide built-in diversification, professional management, and ongoing supervision of the fund’s holdings—all important elements of a well-rounded investment program.

How this works

The potential advantages of mutual funds

See potential risks of mutual funds
  • Built-in diversification

    You’re often invested in several companies within an industry, or even a broader mix across industries, without having to do the work of choosing individual stocks or bonds.

  • Professional management

    You can leave the day-to-day decision making that may arise from changing market conditions to the expertise of professional portfolio managers.

  • Convenience and daily liquidity

    For a modest amount, you’re able to invest in a diversified portfolio for much less than you might pay for individual securities. You can also buy and sell mutual fund shares quite easily.

  • No-transaction-fee options

    Thousands of funds are available at Schwab without loads or transaction fees. (There are underlying costs to managing a fund, factored into its total return.)

The potential risks of mutual funds

See potential advantages of mutual funds
  • About risk

    Mutual funds are subject to the fluctuations of the market, depending on what types of investments they hold. They are not FDIC-insured and do involve some investment risks, including possible loss of principal as well as fluctuation in value.

  • How risky is it?

    A fund’s investment objective, the investment approach of the fund manager, and the fund’s underlying holdings are influential factors in determining a fund’s risk.

  • Before you invest

    Carefully consider whether the fund’s investment strategy and its potential risks are a good fit for your risk tolerance.

Type How it works May be a good option for
Mutual fund strategies
Index fund Attempts to mimic the performance of a specific market index, such as the S&P 500® Index or the Wilshire 5000 Index. First-time and seasoned investors who want broad market exposure and lower fees than those offered by actively managed funds.
Actively managed fund Professional managers choose what they believe are the best investment opportunities, given a fund’s strategy, with the goal of outperforming a specific benchmark. Those who want a professional manager’s investing experience and skills.
Mutual fund offerings
Stock (or equity) fund Invests in U.S. and/or international stocks. These funds offer the potential for long-term growth and have varying risk levels. First-time and seasoned investors who have a longer-term horizon.
Bond fund Invests in either taxable or tax-free corporate, municipal, or government bonds. Those looking for income or those who want a more conservative alternative to equity funds.
Blended or balanced fund Invests in a mix of stocks and bonds with the goal of achieving both investment growth and income. First-time and seasoned investors seeking a more diversified solution.
Target-date or life-cycle fund May hold a mix of stocks and bonds, and automatically shifts its asset allocation as the date you need the money (when you retire, for example) draws near. The funds are built for investors who expect to start gradual withdrawals of fund assets on the target date, to begin covering expenses in retirement. The principal value of the funds is not guaranteed at any time. Retirement investing and automatic rebalancing.

Top Questions

Most investors choose mutual funds because they can offer a level of diversification and convenience. It can be a full-time job to determine your own portfolio’s asset allocation, research individual stocks, and find companies that are attractively priced or positioned for growth, all while keeping an eye on the financial markets. Mutual funds are professionally managed, so you can avoid the day-to-day decision making that investing requires. In addition, buying and selling individual stocks or bonds may become expensive for an individual investor over time. With a mutual fund, the costs of trades are spread over all investors in the fund.
The value of every individual security—a stock or a bond—is priced on a daily basis. Since a mutual fund is a basket of securities, the price of each of its underlying holdings may change value daily. As a mutual fund investor, you own shares of the fund. Each share represents proportional ownership of the fund, and based on the number of shares you own, you may earn a certain amount of income and/or capital gains that the fund generates from its investments.

There are three ways for you to make money in a fund. The fund may earn income from dividends on stocks and interest on bonds, which is passed along to shareholders. In addition, if a fund sells securities that have increased in price, it has a capital gain that’s paid out in the form of a distribution. Finally, if a fund’s share price, or net asset value (NAV), increases during the time you own it and you sell your shares, you earn a profit.
As with all investments, mutual funds do carry risks. Because stock and bond markets fluctuate daily, the prices of a fund’s underlying securities may change daily too. If the value of the fund’s underlying securities declines during the time you own it, the fund’s share price (or NAV) will decline, potentially causing you to lose principal if you sell the fund.
The cost to purchase and own a mutual fund can vary significantly depending on many factors, including the type of fund, the fund manager’s investment strategy, and what types of securities the fund may hold. The expense ratio is the cost for a fund company to manage and operate a mutual fund and is stated as a percentage of the fund’s assets. A fund company may also charge a fee or a sales charge to buy or sell the fund, and such fees are charged directly to fund investors. However, many funds are offered with no transaction fees and no loads, meaning that you do not pay a fee or sales charge to buy a fund.

Schwab’s Mutual Fund OneSource® offers thousands of funds from hundreds of well-established fund families with no loads and no transaction fees.
There are many ways to buy mutual funds. For instance, your company may offer a retirement plan, such as a 401(k), with mutual funds on its menu of investment options. If you are investing outside of your company-sponsored retirement plan, there are many mutual funds that you can purchase directly from the fund company. You can also buy funds through a supermarket, which typically offers thousands of funds from many different mutual fund providers. This broadens the number of alternatives for building and diversifying your mutual fund portfolio.
Yes, mutual funds can be a smart investment for many types of retirement accounts, including an IRA. Once you decide that opening an IRA is right for you, the next step is choosing the type of fund in which you want to invest. If you have a long time horizon until retirement and are comfortable taking on some risk for higher return potential, you may want to consider a stock (equity) fund for your IRA.


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Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate and, although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. Compared to the total return, the seven-day yield more closely reflects the current earnings of the fund.

For Target Date Funds Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can view, download, and print a prospectus by clicking Investor Information, or call 800-435-4000 to request a prospectus. Please read the prospectus carefully before investing. Investment value and return will fluctuate, such that shares, when redeemed, may be worth more or less than their original cost.

The funds are built for investors who expect to start gradual withdrawals of fund assets on the target date, to begin covering expenses in retirement.

ETFs

MUTUAL FUNDS/TARGET DATE FUNDS

STOCKS

FIXED INCOME/ BONDS/ BOND FUNDS

CASH INVESTMENTS