8 Lies You’ve Been Told About Mutual Funds (And Probably Believed)

Mutual funds have become the bedrock of American wealth-building. Whether through their 401(k) or direct investments, nearly 54% of U.S. households have assets under management in mutual funds. For millions of investors, they remain one of the most accessible ways to diversify and build wealth over time. Yet, for an investment vehicle as common as it is, a shocking number of myths and outright falsehoods persist.

If you believe in the financial folklore surrounding mutual funds, you're more likely to pass up good investments or make costly mistakes. To help set the record straight, we will examine eight of the most persistent myths about mutual funds, separating fact from fiction on topics ranging from fees and performance to taxes.

Perhaps the most commonly accepted lie about mutual funds is that their fees are too high and that those costs can eat into your returns. While fees were once high, a decades-long price war has driven them to historic lows.

In fact, the average expense ratio for equity mutual funds held in 401(k) plans fell to just 0.26% in 2024. That's a 66% drop from the 0.76% investors paid in 2000.

The truth: Fees matter, but they're no longer prohibitive. Low-cost funds give investors the ability to build wealth without sacrificing returns.

The idea that you need a small fortune to start investing is another outdated trope. Many major brokerages now allow you to open an account with a $0 minimum.

Many firms have also eliminated investment minimums on their funds. Fidelity even offers a line of "ZERO" index funds that have both a $0 investment minimum and a 0% expense ratio.

The truth: You don't need a fortune to start investing. With minimal barriers, mutual funds are accessible to nearly everyone.

We all love the myth of the stock-picking genius. However, the data clearly indicate that most active managers fail to outperform their benchmarks.

Over the 15-year period ending in 2024, a staggering 89.5% of large-cap active funds underperformed the S&P 500. This trend holds true across nearly all fund categories, proving that consistent outperformance is exceedingly rare.

The truth: Beating the market consistently is rare. Low-cost index funds often outperform their active counterparts over the long run.

There's no such thing as risk-free investments, and this certainly holds true for bond funds, which are subject to both interest rate risk and credit risk.

When interest rates rise, the value of existing, lower-yielding bonds falls. Credit risk is the danger that a bond issuer will default on its payments. The volatile rate environment in 2025, combined with rising corporate default projections, is proof that bond funds can and do lose money.

The truth: Bond funds can help diversify your portfolio, but they are not risk-free.

While mutual funds are often preferred in tax-sheltered retirement accounts like 401(k)s and IRAs, you can hold them in any standard brokerage account.

However, you should be aware of the tax implications. In a taxable account, you can owe taxes on "phantom gains," which are the capital gains distributions made by the fund manager. While phantom gains can create profit for inventors, they can also cause the mutual fund's overall value to fall.

The truth: Mutual funds work in both retirement and taxable accounts — you just need to be mindful of tax implications.

In the digital age, you don't have to hire an advisor to simply buy mutual funds. DIY investors purchase funds from numerous online brokerage platforms every day. Given the low minimums to get started and how easy these platforms are to use, you can certainly go it alone.

But even though you don't have to hire an advisor, their perspective is still valuable. It's always worth consulting a professional before making any investment.

​​The truth: You don't need an advisor just to buy mutual funds—but professional guidance can help you avoid bigger mistakes.

Unlike mutual funds, which are traded once per day, exchange-traded funds are sold like stocks in an exchange throughout the day. ETFs are growing in popularity to the point that some claim they've made mutual funds outdated.

However, it's more of a situation where the two co-exist. Mutual funds remain the dominant vehicle in American retirement investing, holding up to 66% of all 401(k) assets. ETFs, meanwhile, are often considered more suitable for taxable accounts.

The truth: ETFs and mutual funds coexist. Each has unique advantages depending on your goals and account type.

You know the disclaimer: "Past performance is no guarantee of future results." This still applies, even when a mutual fund is particularly hot.

The truth is that top performance rarely persists. Some might even say an excellent track record is due to luck more than skill, so don't let recent strong performance change your investment strategy.

The truth: Past performance is no guarantee of future results. Focus instead on fees, diversification, and long-term strategy.

Once you get past the myths of mutual funds, you'll find a financial instrument that has stood the test of time. And what a time it is to be in mutual funds. Fees are at historic lows, you can start investing with pocket change, and it's clear the markets love them.

As of June 2025, the total assets held in index-based mutual funds and ETFs ($17.51 trillion) are worth more than the assets held in actively managed accounts ($16.44 trillion). Only recently have passive investments like mutual funds started to outpace their actively managed counterparts. Not bad for a financial instrument with so many myths attached to it.