Are mutual funds a good investment for beginners?

Mutual funds can be a good investment for beginning investors because they don't require extensive research on individual securities. This makes them simple to invest in. As long as a fund has a low expense ratio, a proven track record with its existing manager and financial goals and risk levels that match your own, they can be a good choice for beginners.

Is a mutual fund good for long-term financial goals?

Yes. Mutual funds can be one way to diversify your portfolio, as it spreads your funds across several different assets. In other words, it prevents you from putting all of your eggs in one basket. This can balance out any ups and downs in the market.

What are the primary risks of mutual funds?

The performance of mutual funds is tied to the market conditions. Long-term investments can weather short-term market fluctuations, but investors should be prepared for the ups and downs that come along with mutual fund investments, whether they are in stocks, bonds or other types of securities. Mutual funds also come with management fees and expense ratios that can eat into your returns. Long-term investors need to be aware of these costs and select funds with reasonable expense ratios.

Why are mutual funds important for diversification?

Mutual funds can provide instant diversification because they tend to hold hundreds or even thousands of securities. With a single purchase, an investor can instantly own all of the stocks in the S&P 500, for example, or a collection of growth stocks hand-picked by a professional manager.

Can mutual funds lose money?

Mutual funds provide no guarantee against loss. Their performance is tied to the returns of their investments. If the stocks, bonds, or other securities that a fund owns trade down in value, so too will the mutual fund share price.

How do mutual funds compare to ETFs for retirement investing?

The primary difference between mutual funds and ETFs is that ETFs trade on the stock market and can be bought and sold at any time. They also tend to be passive investments that track market indexes, unlike mutual funds which are typically actively managed by professional investors. Mutual funds can also be bought or sold just once per day, at the close of business directly from the mutual fund company.

How do I know if a mutual fund is worth the cost?

Mutual fund fees drag down returns. If your fund can still manage to outperform its peers and its benchmark index -- without taking on excess risk -- then it may be worth the cost you are paying.

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Are Mutual Funds a Good Investment?

February 21, 2025

9 min Read

Written by John Csiszar

Edited by Melanie Grafil

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Mutual funds are investment vehicles that pool money from multiple investors to buy a diversified portfolio of stocks, bonds or other securities. There are literally thousands of mutual funds available, covering every imaginable type of investment. This can be a great way for investors to get access to hundreds of even thousands of individual investments via a single purchase.

But are mutual funds really a good investment, and why? Read on to find out.

Are Mutual Funds a Good Investment?

Here are some of the top reasons why investors flock to mutual funds.

Why Mutual Funds Are a Good Investment for Many People

One of the primary benefits of investing in mutual funds for the long term is diversification. By investing in a range of assets, mutual funds minimize the risk that comes with putting all your eggs in one basket. This diversification is particularly beneficial over the long term as it helps with riding out market volatility.

Mutual funds are also managed by professional fund managers who make informed decisions about buying and selling securities. This can make them an excellent choice for beginning investors or for those who don’t have the time, expertise or a combination of both, to pick their investments.

Another benefit of mutual funds is that they have relatively low minimum investment requirements, making them accessible to a wide range of investors. Additionally, they offer flexibility in terms of investment. Investors can make lump sum purchases or set up Systematic Investment Plans, or SIPs, which consistently invest money in a fund no matter what the market is doing. This can be a good long-term investment strategy, as it means you’ll be buying more shares when the market is down and fewer when it is expensive.

Scenarios Where Mutual Funds Are Beneficial

Mutual funds are best used as long-term investments rather than trading vehicles. This makes them a good choice for financial goals like retirement or education savings.

Mutual funds are also a good option for passive investors seeking steady growth without frequent monitoring. As long as an investor understands the financial objectives and risk profile of a mutual fund, it only requires periodic check-ins.

Situations Where Mutual Funds May Not Be Ideal

Mutual funds have many strengths, but they aren’t a complete solution for all investors. For example, if you prefer to make your own decisions regarding which stocks and bonds to own, a mutual fund isn’t the right choice for you. When you invest in a mutual fund, you’re handing over all control of investment selection to the managers running the fund.

A fund may also not be the right choice if it charges high fees. Commissions and sales loads take money out of your investable funds right away, and ongoing expense ratios nibble at your principal balance every year as well.

Over time, mutual funds can sap a large amount of fees out of your account value. While you should expect to pay some costs to hire top-tier mutual fund managers, if the costs outweigh the benefits, it’s not a good investment.

Are Mutual Funds Good for Long-Term Investing?

Mutual funds are designed as long-term investments. Here are some of the reasons why.

The Case for Long-Term Investing With Mutual Funds

Just like individual stocks, some mutual funds outperform market averages while others underperform. But in a telling statistic, most individual investors actually achieve returns lower than the funds they invest in, according to Morningstar. This “investor return gap” is due in part to the fact that many investors don’t hold their mutual funds for the long run. Unfortunately, many sell out when the markets are falling and don’t buy back in until the market is up again, missing the gains on the initial bounce back.

This alone is a great argument for holding good funds for the long run.

Long-term fund holders also benefit from compounding returns. When dividends or capital gains, or both, are reinvested into a fund, they earn interest upon interest over time. Compounding was dubbed the “eighth wonder of the world” by no less than Albert Einstein, but it takes years and years to fully benefit from its effects. Long-term holders are the ones who reap this benefit.

Best Practices for Long-Term Mutual Fund Investing

To maximize the return you can get from mutual funds, focus on these areas:

Choose funds with low expense ratios.
Make regular investments through dollar-cost averaging.
Avoid the temptation to overtrade.
Choose funds that match your investment objectives and risk tolerance.
Monitor and rebalance your fund portfolio regularly.

Evaluating Mutual Funds Before Investing

There’s more to a mutual fund than what appears on its glossy promotional materials. Here are the things you’ll want to check out before you invest.

Key Metrics To Consider

All mutual funds have an expense ratio, which is the amount of annual charges the fund takes out of customer account balances to pay for the costs of running the fund. Your goal as an investor should be to find the best fund you can that has the lowest expense ratio.

Although mutual fund companies love to market the past performance of their best funds, it’s important to understand that past performance is no guarantee of future returns. Although it can be a good sign that a manager understands the markets, it’s also good to know that a fund may be trading on a prior manager’s performance. Be sure to check the current manager’s tenure with the fund to see if it matches a fund’s period of outperformance.

While not as critical as some other factors, a fund’s turnover is also something worth noting. This refers to how often a fund’s manager buys and sells securities in the fund. An actively trading manager may create tax liabilities for shareholders in the form of short-term capital gains.

Understanding Fund Prospectuses

Fund prospectuses contain all of the relevant legal information regarding a fund. While they can be tedious to read, they include some very important facts about the fund. For example, the fund’s investment objectives and trading restrictions will be listed in the prospectus, as will the risks involved, current holdings and fees.

How To Start Investing in Mutual Funds

Here’s how to get started with investing in mutual funds.

Steps for Beginners

Choose a brokerage or investment platform: Some mutual funds are only available from the brokerage firm that manages them. Others may charge more fees to buy certain funds than others. Choose the right brokerage or investment platform that can provide you with low-cost access to the funds you want.
Identify financial goals and match them with fund types: With thousands of mutual funds available, you’ll have to do some sifting to filter out funds that don’t match your financial goals and risk tolerance. If your objective is long-term capital growth, for example, there’s no need to look at U.S. Treasury bond funds.
Verify account minimums: Some funds may have no minimum investment at all, while others might require thousands of dollars to purchase.
Watch out for high fees or commissions: While mutual fund costs have been steadily falling over the years — and many are available for no commission at all — some funds still have various forms of sales charges attached to them.
Invest your money: Once you’ve done your research, invest in the fund(s) you want, either via an online trade or with your financial advisor.

FAQs About Mutual Funds Here are more answers to address your common questions related to mutual funds and long-term investing.

Are mutual funds a good investment for beginners?
- Mutual funds can be a good investment for beginning investors because they don't require extensive research on individual securities. This makes them simple to invest in. As long as a fund has a low expense ratio, a proven track record with its existing manager and financial goals and risk levels that match your own, they can be a good choice for beginners.
Is a mutual fund good for long-term financial goals?
- Yes. Mutual funds can be one way to diversify your portfolio, as it spreads your funds across several different assets. In other words, it prevents you from putting all of your eggs in one basket. This can balance out any ups and downs in the market.
What are the primary risks of mutual funds?
- The performance of mutual funds is tied to the market conditions. Long-term investments can weather short-term market fluctuations, but investors should be prepared for the ups and downs that come along with mutual fund investments, whether they are in stocks, bonds or other types of securities. Mutual funds also come with management fees and expense ratios that can eat into your returns. Long-term investors need to be aware of these costs and select funds with reasonable expense ratios.
Why are mutual funds important for diversification?
- Mutual funds can provide instant diversification because they tend to hold hundreds or even thousands of securities. With a single purchase, an investor can instantly own all of the stocks in the S&P 500, for example, or a collection of growth stocks hand-picked by a professional manager.
Can mutual funds lose money?
- Mutual funds provide no guarantee against loss. Their performance is tied to the returns of their investments. If the stocks, bonds, or other securities that a fund owns trade down in value, so too will the mutual fund share price.
How do mutual funds compare to ETFs for retirement investing?
- The primary difference between mutual funds and ETFs is that ETFs trade on the stock market and can be bought and sold at any time. They also tend to be passive investments that track market indexes, unlike mutual funds which are typically actively managed by professional investors. Mutual funds can also be bought or sold just once per day, at the close of business directly from the mutual fund company.
How do I know if a mutual fund is worth the cost?
- Mutual fund fees drag down returns. If your fund can still manage to outperform its peers and its benchmark index -- without taking on excess risk -- then it may be worth the cost you are paying.

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