Benefits and considerations of mutual funds
Have a look at all the advantages of mutual funds and learn about the things you'll want to keep in mind.
On this page:
Why invest in mutual funds?
Over half of U.S. households own mutual funds.* Here are some of the reasons they're so popular:
- Mutual funds give you an efficient way to diversify your portfolio, without having to select individual stocks or bonds.
- They cover most major asset classes and sectors.
- Schwab offers 50+ core mutual funds with no Tooltip , no transaction fees, and no investment minimums.
- Schwab Mutual Fund OneSource® allows you to buy and sell mutual fund shares without incurring loads or transaction fees.
- You can automatically reinvest dividends and capital gains distributions.
- Fund managers do the research for you. They research and select securities and monitor the fund's performance.
For more insights, read "Why buy a mutual fund?"
How do you typically earn a return from a mutual fund?
Dividends and interest
A fund may earn income from dividends on stocks or interest on bonds, which is passed along to its shareholders (minus any expenses).
Capital gain distributions
If the fund sells securities that have increased in price, the fund has a Tooltip . Most funds pass along these gains, minus any capital losses, to investors at the end of the year.
Fund share price increase
If the fund's securities increase in price during the time you own the fund and the manager holds onto them, the fund's shares increase in value. You can then sell your fund shares for a profit.
What are the considerations when investing in a mutual fund?
Active vs. passive management
- Most funds are actively managed. Active funds aim to outperform the market compared to a specific benchmark.
- Index funds are passively managed, aiming to mimic the investment holdings and performance of a specific index.
Role in your portfolio
- Think about the goals you want to achieve with a fund – total return, income, social responsibility, etc.
- If you want to match market performance, consider index funds.
- If you want to potentially outperform the market, look at active funds.
- It's typically best to look at a fund's performance through a full-market cycle, which is typically three to ten years.
- Be sure to also compare a fund's returns to an appropriate benchmark (for example, the S&P 500®), as well as funds that invest similarly
- These are the percentage of invested assets paid to run the fund.
- Expense ratios vary by fund management (index vs. active), category, company, and even from fund to fund.
- Generally, index funds have the lowest expense ratios because they're passively managed.
- For mutual funds outside of your retirement account, be aware you may be taxed on the fund's distributions, even if you continue to hold the fund or just purchased your shares.
- Consider a fund's turnover ratio; the longer the fund holds its securities, the lower the turnover and the lower the potential tax liability, and vice versa.
- How long the current manager or management team has been in place can be key when considering active funds, since they choose the fund's investments.
- Be sure the timeframe you're reviewing represents the same length of time the manager has been running the fund.
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