Mutual funds pool money to create larger investment opportunities with higher returns for anyone who initially invests in the fund.

Investing in mutual funds can give you access to a wide range of securities, such as stocks and bonds, with just a single investment.

Mutual funds are categorized as stock, bond, money market, and target-date funds.

How mutual funds work

Mutual funds function similarly to other types of investments. If you want to invest, you go through a brokerage firm. However, they have a few key differentiators. Most are actively managed by a broker instead of passively earning you returns. Plus, they can carry some hefty fees.

ETFs and mutual funds both pool money into a basket of investments—but the key difference between them is that mutual funds trade just once per day after the market closes, while ETFs trade like stocks throughout the day at fluctuating prices.

Mutual funds invest in multiple different companies with money from many investors, while an individual stock invests in one company with funds from a single investor.

Read about the pros and cons of mutual funds.

Mutual funds were first created and sold in the US in 1924.

Mutual funds come with a few associated fees.

Mutual fund investors typically must pay a variety of different types of taxes associated with their investment, unless the funds are within tax-advantaged accounts like a 401(k) or IRA.

Mutual fund share classes are rankings of different types of services for investors.

Figure out what type of mutual fund is right for you with a tool that lets you compare different mutual funds, from rates to returns.

Explore a list of the world's largest mutual funds.

Contrary to popular belief, random investments can outperform managed funds.

Open-end and closed-end mutual funds differ in how they create and distribute shares.

Index funds are typically structured as either mutual funds or exchange-traded funds, but investors can manually recreate an index through 'direct indexing.'

People often invest in alternative investments to diversify their portfolios

Because alternatives often have little correlation with traditional investments like stocks and bonds, adding them to a traditional portfolio can reduce its overall risk exposure.

Mutual funds in seven broad categories averaged a 13.1% annual return in 2023.

A bond ETF lets someone invest in multiple bonds through one single fund

There are risks, there are also major perks to buying a bond ETF, like the ability to purchase bonds on the stock market.

Investors can buy three main types of bonds: government, corporate, and municipal

Each type has variations of its bond offerings with different interest rates, loan lengths, maturity dates, and terms. Each type also carries its own risks and rewards.

The term 'securities' refers to different types of investments, such as stocks or bonds.

The price of a mutual fund is based on its net asset value (or NAV).

There are three main ways to start investing in the bond market

Invest in the boind market through a brokerage, mutual fund or ETF, or the US government. Each has different steps and terms to follow, from starting rates to opening specific accounts. Some bonds are relatively easy to purchase, but the process differs depending on the type of bond you want.

ETFs were first created as an alternative to mutual funds, combining the diversification benefits of a mutual fund with the ability to trade throughout the day on a stock exchange.

Alternative investments can be sorted into seven major categories, according to some experts

These categories include real estate, private equity, private debt, hedge funds, collectibles, and more.

Explore the differences between private equity, venture capital, and hedge funds

Private equity firms focus on buying and improving private companies with the intent to sell them for profit or take them public. Venture capital is technically a form of private equity in which investors focus on startups and generally don't seek majority control of the company. Hedge funds are pooled investments for sophisticated investors that pursue a wide range of often complex strategies.

Alternative investments can include everything from cryptocurrency to fine art

The financial assets typically fall outside the scope of traditional investments like stocks and bonds, and they’re often intended to diversify investor portfolios.

The 'Big Three' asset managers—Vanguard, State Street, and BlackRock—collectively manage more than $30T in assets and are the largest shareholders in roughly 88% of all the companies listed on the S&P 500.

Many hedge funds use short selling as an alternative investment strategy to offset risk

Hedge funds typically use a "long-short" investment strategy—where funds diversify by investing in a mix of long positions and short positions—to balance risk and maximize profits. Including short positions gives hedge funds some protection against downturns in the market, although the strategy can have uncapped losses for investors.

The difference between stocks and bonds

While more people invest in stocks than bonds, experts say owning both can make for a healthier portfolio. Stocks are considered a riskier investment than bonds, but tend to have higher returns. While bonds might be the safer option, they won’t grow your wealth as quickly.

ETFs and mutual funds are both taxed on capital gains and on dividends.

Hedge funds make money from imposing steep fees on investors, as well as from investment performance

Hedge funds often operate on a "2 and 20" model: Investors pay fund managers a 2% management fee, and the hedge fund keeps 20% of their profits. (The 2% is imposed annually, irrespective of performance.) Hedge funds are known for chasing big returns—and taking big risks to get them. This explainer not only breaks down how they work in detail, but also the strategy first introduced in 1949 that still shapes hedge fund investing today.

Some multibillion-dollar pension funds depend on hedge funds

Pensions are responsible for safeguarding the retirement plans of many corporate and government employees alike. Pensions differ from 401(k) plans and sometimes rely on alternative assets, like hedge funds, to insulate their portfolios of billions of dollars from volatility in financial markets. Read the case top pension advisor Cambridge Associates makes for hedge funds.

The majority of capital in private equity funds is provided by institutional investors

The individuals who invest this initial capital are called the firm's limited partners. Private equity firm LPs include sovereign wealth funds, university endowments, high-net-worth individuals, and more.

Retail investors cannot directly invest in private credit funds—but other financial vehicles can offer exposure to the industry

For example, as some US regulations have loosened in recent years, retail investors have begun to get exposure to the private credit market via ETFs that invest in publicly traded financial vehicles with private credit exposure, such as BDCs.

Explore a step-by-step guide for getting started as a retail investor

Instead of purchasing individual stocks and bonds, new investors may want to start in funds that track an index—like the S&P 500—or that hold a group of themed stocks.

One $100 investment in the Medallion Fund skyrockets over time

The Medallion Fund, the famously secretive quant fund that invests billions of dollars for the partners and employees of a single firm with a legendary track record, has trounced the market for more than three decades. While its results are an extreme outlier, this visualization showcases the power of compound interest.

Test your ETF knowledge

A 10-question quiz from the SEC allows investors to test their basic knowledge about exchange-traded funds and their investing counterparts, mutual funds. Here’s a sample question: Is the past performance of a fund a good indicator of future results? (Hint, the answer is no).