What is a Mutual Fund?

Mutual funds are the old-school way to invest. Before ETFs came along, this was the default. If you had a 401(k), odds are it was stuffed with them. They’re still everywhere — but just because they’re common doesn’t mean they’re simple, or the best choice today.

At its core, a mutual fund is just a giant pool of money. You put in your dollars, so do thousands of other investors, and a manager decides what to buy and sell. When you own shares, you own a piece of the whole basket.

Sounds fine, right? Here’s where it gets messy.

The Trading Problem

With ETFs, you hit “buy” and you know your price instantly. Mutual funds? They only trade once per day. Put in your order at 10 a.m., you won’t know the price until 4 p.m. No control. No flexibility.

If you’re a long-term retirement investor, maybe that’s fine. But compared to how the rest of the market works now, it’s clunky.

And trading isn’t the only headache — costs are another.

The Cost Problem

Mutual funds love fees. Expense ratios of 0.5%–1% are normal. Some even tack on “loads,” which is Wall Street code for a sales commission. That’s money out of your pocket before you’ve even started.

Yes, there are cheap index mutual funds — Vanguard built its reputation on them. But the industry is full of actively managed funds charging high fees while failing to beat the market. You’re basically paying extra to lose.

For comparison, check how ETFs handle fees in What is an ETF?.

And even if you swallow the fees, taxes can sting too.

The Tax Problem

Here’s the kicker. Let’s say the manager sells stocks in the fund, or other investors pull their money and the fund has to sell to cover it. That creates capital gains. Guess who pays taxes on them? You — even if you didn’t sell a single share.

ETFs are structured differently, which makes them more tax-efficient. In a taxable account, that difference adds up. For a breakdown of how this plays out in practice, see How to Start Investing in Stocks — The ETF Reality Check.

So what kinds of mutual funds are actually out there — and which are worth paying attention to?

Types of Mutual Funds

• Index funds: Cheap, track a benchmark like the S&P 500. Honestly, these are the only mutual funds still worth holding.
• Actively managed funds: You’re betting on a manager. Odds are they don’t beat the market after fees.
• Bond funds: Pools of government or corporate bonds for income. Sensitive to interest rate swings.
• Target-date funds: Popular in 401(k)s. They shift from stocks to bonds as you age. Convenient, but one-size-fits-all doesn’t always fit.

Knowing the types is one thing — but the real comparison most people care about is ETFs versus mutual funds.

Mutual Funds vs. ETFs

• Liquidity: ETFs trade instantly. Mutual funds once a day.
• Costs: ETFs are usually cheaper. Mutual funds love fees.
• Taxes: ETFs are more tax-efficient. Mutual funds stick you with surprise bills.
• Transparency: ETFs disclose holdings daily. Mutual funds only quarterly.

So why are mutual funds still around? Simple: inertia. Retirement plans are built on them. Millions of investors stick with whatever’s offered.

But that doesn’t mean they’re always the best tool.

The Reality

Mutual funds built the modern investing industry. They gave regular people access to markets at scale. But today, they’re outdated tools.

Bottom line: A mutual fund is the old-school way to invest. It still has a place in retirement accounts, but if you’re starting fresh today, ETFs usually beat them.