Best Mutual Funds for Beginners: Fees, Pros, and Cons

A mutual fund is an investment that collects money from investors and uses it to buy a mix of stocks, bonds, or other assets for you. If you want to invest in mutual funds, there are a few that stand out: Schwab S&P 500 Index Fund (SWPPX), Vanguard 500 Index Fund Admiral Shares (VFIAX), Fidelity 500 Index Fund (FXAIX), Vanguard Total Stock Market Index Fund (VTSAX), and T. Rowe Price New Horizons Fund (PRNHX).

5 Solid Mutual Funds for Beginner Investors

When you’re choosing mutual funds, focus on three basics: fees, performance history, and how well the fund spreads your money across different investments. Fees affect how much you keep, a good track record shows the fund has been managed well over time, and diversification helps lower your risk without extra work on your end. Below are the mutual funds that check all three boxes.

1. Schwab S&P 500 Index Fund (SWPPX)

Best for: Beginners who want an easy, low-cost starting point with no minimum investment.

SWPPX is a classic S&P 500 index fund, meaning its main goal is to invest in the 500 largest US companies across a wide range of major industries. One of the biggest advantages of this fund is its extremely low expense ratio of just 0.02%, which makes the cost of holding it negligible and ensures you keep more of your returns. There’s also no minimum investment requirement to get started, so you can begin investing with whatever amount of money you have available.

Over the last decade, this fund has provided strong long-term returns, and since it pays quarterly dividends that can be automatically reinvested, you can accelerate the power of compounding to grow your balance over time.

2. Vanguard 500 Index Fund Admiral Shares (VFIAX)

Best for: Long-term investors who can meet the $3,000 minimum and prefer simple, broad market exposure.

VFIAX tracks the exact same S&P 500 index as the SWPPX fund, offering instant diversification by making sure your investment is spread across 500 of the largest US companies. Although this fund comes with a $3,000 minimum initial investment, it also features a very competitive 0.04% expense ratio, which helps minimize your costs in the long term.

The majority of actively managed large-cap funds have historically failed to outperform the S&P 500 over many years, so VFIAX offers a straightforward solution by simply matching the performance of the market instead of trying to predict and beat it. If you prefer a truly set-it-and-forget-it strategy and you have the capital to meet the initial minimum, this fund provides simple, predictable, and broad market exposure.

3. Fidelity 500 Index Fund (FXAIX)

Best for: Cost-conscious beginners who want one of the lowest-fee S&P 500 index funds available.

FXAIX represents one of the cheapest ways to gain broad exposure to the US stock market because it only charges a negligible 0.015% annually, meaning you only pay about $1.50 per year for every $10,000 you have invested. Just like the other S&P 500 index funds, this fund holds all 500 stocks within that index, giving you immediate diversification across major sectors including tech giants, healthcare leaders, financial powerhouses, and large industrial companies.

To top it off, FXAIX doesn’t require any minimum investment, making it highly accessible whether you're starting out with $100 or $10,000. For over a decade, it’s had average annual returns exceeding 11%, with its overall performance tracking the S&P 500 nearly perfectly.

FXAIX is designed for automation: Set up monthly contributions and then let the fund run on its own. Your dividends will automatically reinvest, meaning this combination of low fees and consistent performance relies on time and compound growth to do the heavy lifting for you instead of gambling on which individual stocks might win.

4. Vanguard Total Stock Market Index Fund (VTSAX)

Best for: Investors who want exposure to the entire US stock market, not just large-cap companies.

If you’re looking for even broader diversification than what you get from just tracking the S&P 500, VTSAX is the perfect solution. Instead of limiting you to the largest 500 companies, this fund provides exposure to thousands of US companies, including large-cap, mid-cap, and small-cap stocks across every major sector of the economy. This means you own shares of established market leaders like Apple and Microsoft while at the same time also getting exposure to smaller companies that have high potential for aggressive growth. The expense ratio is extremely low at 0.04% so costs are minimal while you capture the performance of the entire US stock market.

It’s important to note that VTSAX does require a $3,000 minimum investment, but once you meet that, you’re free to contribute any amount you want. This fund is a particularly beneficial option if you already hold an S&P 500 fund and want to fill in the gaps with exposure to smaller companies that might outperform over decades. Its quarterly dividends reinvest automatically, and the inherent tax efficiency of index funds usually results in fewer unexpected taxable events eating into your returns compared to the actively managed alternatives.

5. T. Rowe Price New Horizons Fund (PRNHX)

Best for: Investors who already have index funds and want a smaller, growth-focused addition to their portfolio.

PRNHX stands out from the others on this list because it’s actively managed, meaning it doesn't just passively track a preset index. This fund focuses on small- and mid-sized growth companies, targeting businesses emerging as leaders within their industries and that have a much higher potential for growth compared to the more established large-cap stocks.

Because of this active management approach, the expense ratio is 0.73%; that sounds significantly higher than the index funds mentioned above, but that fee pays for a professional management team dedicated to actively researching and selecting individual stocks.

Naturally, PRNHX carries higher risk and volatility than broad market index funds, which means your returns will experience more dramatic fluctuations. However, this aggressive growth strategy can pay off over time as long as you have decades until retirement and can stomach the inevitable ups and downs of the market. To get started, you’ll need a $2,500 minimum investment.

I only recommend including PRNHX if your portfolio already has a solid foundation of low-cost index funds and you’re specifically looking to add some growth-focused diversification. Don’t make this your entire investment strategy; rather, use it as a smaller component of your total allocation (maybe only 10-20% of your portfolio) if you want to bet on smaller companies outperforming.

The Real Pros and Cons of Investing in Mutual Funds

Mutual funds are not a perfect investment, and they definitely aren’t the right fit for every investor. Like any other financial product, they come with real tradeoffs and compromises. I still recommend index funds as the foundation of most portfolios, but if you’re considering mutual funds because you value convenience, built-in diversification, or professional management, it's important to understand where they genuinely excel and where they tend to fall short. Below are the key pros and cons to keep in mind before you decide.

Pros of Mutual Funds

There are several advantages that can make mutual funds a great fit for building long-term wealth:

1. Instant diversification without the work

When you buy a single share of a mutual fund, you instantly own pieces of dozens, hundreds, or even thousands of different companies. This level of diversification dramatically reduces your overall risk compared to the concentrated risk you take on when you try to pick individual stocks and hope they win. You get broad market exposure across multiple industries, various company sizes, and different economic sectors without having to spend weeks researching companies or constantly monitoring individual stock holdings.

2. Hands-off professional management

For actively managed mutual funds, you’re paying a team of experienced portfolio managers to conduct all the necessary research, analyze market data, and execute the hard decisions about which securities to buy and sell on your behalf. This means you don’t have to spend hours studying financial statements, monitoring market trends, or striving to become an investment expert yourself; you simply contribute your money and let the professionals handle the day-to-day heavy lifting and investment strategy.

3. Automatic reinvestment accelerates your returns

Most mutual funds are designed to pay out dividends and interest, and they generally allow you to set these payments to reinvest automatically. This setup means your earnings immediately buy more shares, which in turn generate their own dividends and interest, creating a powerful compounding effect that significantly grows your overall wealth faster over time. You can set this feature up once and effectively forget about it so the compounding magic works silently in the background.

4. Liquidity and pricing transparency

Shares in mutual funds are priced at the end of every business day, which means you always know exactly what your investment is worth. You can also sell your shares and access your money relatively quickly whenever you need it, which provides a level of liquidity that isn’t available with some of the more restrictive investments. For investors, this constant transparency and ease of access can mean the key to significant flexibility and peace of mind.

The Cons

Some of these drawbacks can substantially impact your long-term returns:

1. Fees eat significantly into your returns over time

Even funds advertised as "low-cost" charge annual expenses, and for actively managed funds, these charges typically range from 0.50% to 1% or higher. While that may seem small, when compounded over 30 years, it accumulates into thousands of dollars in lost growth. A fund that charges 1% annually versus one that charges 0.04%, for example, means you’re giving up roughly 25-30% of your total long-term returns to fees alone. That money should have stayed in your pocket.

2. Market risk means your money can disappear

Since mutual funds own stocks and bonds, their value is directly subject to the constant fluctuations and general instability of market conditions. A major economic recession has the potential to cut your portfolio value in half, or you could invest an initial $10,000 and see it drop to $5,000 depending on the severity of the market cycles. Although markets have historically recovered and grown over time, that doesn’t protect you from losing money in the short term, especially if you’re forced to sell your shares during a market downturn.

3. Tax inefficiency creates unexpected bills

Even if you personally decide not to sell any of your shares, mutual fund managers might sell securities within the fund at a profit to meet their investment strategy or fund redemptions. When that happens, the fund is legally required to distribute them to its shareholders and as an investor, you become responsible for paying taxes on them, regardless of whether you wanted to sell. Additionally, any dividends and interest earned within the fund are also considered taxable income. This caveat means your annual tax bill can be higher than you’d expect, which ultimately eats into your returns.

4. Actively managed funds rarely outperform after fees

The data available on actively managed funds shows a clear trend: The majority of them fail to consistently beat the returns of low-cost index funds over periods of 15 years or more. This means you’re paying significantly higher fees for professional management with absolutely no guarantee, or even likelihood, that you’ll earn better returns. In fact, after accounting for those higher fees, you’re mathematically more likely to end up with worse returns.

Build Your Rich Life With the Right Mutual Fund Strategy

Long-term investing is one of the most tried and true methods available for building wealth over time, and the fact that you’re researching your options means you’re planning for your financial future. My consistent go-to recommendation is always index funds because they’re low maintenance, extremely cheap to own, and don’t force you to constantly monitor or second guess your investment decisions. But if you’re looking for an alternative approach and you’re willing to carefully weigh all the pros and cons, mutual funds are absolutely a solid and viable option to consider.

The most important thing is to have a clear understanding of what you’re committing to: the fees you will pay, the level of risk you’re willing to take on, and whether you’re comfortable with potential tax inefficiencies and the volatility of the market. Once you’ve made an informed decision, automate your contributions, keep your money consistently invested for years, and simply let the powerful effect of compound growth do the heavy lifting for you. That simple, consistent approach is what truly protects your long-term wealth and prevents it from going to waste.