How To Invest in Vanguard Mutual Funds (2024)

With over $6.2 trillion in global assets under management, Vanguard is one of the largest and most well-respected investment firms in the U.S. Vanguard offers a wide range of low-cost mutual funds, offering investors options for strong performance and market diversification. Here’s everything you need to know about Vanguard’s mutual funds.

Overview of Vanguard Mutual Funds

When you buy shares in Vanguard mutual funds, you are investing in hundreds or even thousands of securities at once, providing excellent diversification. Vanguard is famous for having launched the first index mutual fund for individual investors. Index funds match the performance of market indexes, such as the S&P 500 or the Dow Jones industrial average.

Vanguard has more than 130 mutual funds to choose from in the following asset classes:

• Money market funds:Relatively low-risk investments, money market funds invest in short-term investments issued by U.S. corporations and federal, state and local government agencies.
• Bond funds: Bond fundshave a higher risk than money market funds, but they can provide stability to supplement stock investments.
• Stock funds: With stock funds, you can invest in domestic or international companies of all sizes and industries.
• Target date funds: Target date funds invest in a mix of stocks, bonds and other securities. As you approach your target date, the fund becomes increasingly conservative to mitigate risk.

How Mutual Funds Work

Mutual funds are a popular choice for investors. Rather than investing in individual stocks, a mutual fund pools money from investors and buys portfolios of securities like stocks, bonds and short-term debt.

Mutual funds are professionally managed, so a fund manager does the research on what securities to purchase for you. When you purchase a share of a mutual fund, you may get instant diversification, because mutual funds typically invest in a range of companies and industries at once. Investing in a mutual fund instead of individual stockshelps lower your risk. If one security performs poorly, the other securities can offset its losses.

Actively Managed Funds vs. Passive Funds

Actively managed funds attempt to outperform a benchmark index. The portfolio manager selects securities for the fund according to the fund’s criteria. That means there may be more trades, more effort required by management and more taxable capital gains. This is also why fees are generally higher with actively managed funds. The minimum investment for most Vanguard actively managed funds is $50,000.

Index funds are passively managed mutual funds, where the goal is to match the performance of a certain index or benchmark, rather than outperform it. The fund manager will buy all—or a representative sample—of the stock or bonds in the index. There are fewer trades, so there are usually fewer taxable capital gains. Fees are generally lower for passively managed index funds. For most Vanguard index funds, the minimum investment is $3,000.

How Mutual Funds Earn Money

You earn money with mutual funds in three ways:

• Dividend payments: The mutual fund can earn income from dividends on stock or interest from bond. Shareholders will get almost all of the income, minus expenses.
• Capital gains distributions: The price of the securities within the mutual fund can increase over time. If that happens and the fund sells a security, the fund has a capital gain. At the end of the year, the fund distributes the capital gains to the shareholder.
• Increased market value: If the market value of the portfolio increases (after subtracting the portfolio’s expenses) the value of the fund and its shares increases.

What Sets Vanguard Mutual Funds Apart?

Vanguard is known for its relatively low costs. According to the company, its average expense ratio—which is the cost you pay for administrative and operational costs— is 0.10%. The industry average expense ratio is 0.57%.

Vanguard offers a broad selection of no-load mutual funds, meaning there are no sales fees on either the front end or back end when you buy or sell fund shares. The firm’s funds are known for their reliable performance: According to Vanguard, 87% of its no-load mutual fundsperformed better than their peer-group averages over the past 10 years.

To give you an idea of typical returns, we looked at five of Vanguard’s mutual funds and how they performed over the past decade. We also consulted Morningstar to seehow it rated these funds. Morningstar analyzes past returnsand assigns funds a star rating based on how well the fund has compensated shareholders for the risk they took on. The best performers receive five stars, while the worst receive just one star. We found that Vanguard’s funds were consistent high performers, with three of the five receiving five stars.

*All annual return figures good as of June 30, 2021.

Vanguard Admiral Shares vs Vanguard Investor Shares

Vanguard offers two classes of shares to individual investors: Admiral Shares and Investor Shares. Vanguard Admiral Shares cost $3,000 for most index funds and $50,000 for most actively managed mutual funds. Certain sector-specific Vanguard index funds charge $100,000 for Admiral Shares.

In the past, Admiral Shares were much more expensive than Investor Shares, although their prices have fallen considerably. Vanguard originally implemented the two-share structure to pass along savings when shareholders would invest more money with a fund.

Most Vanguard index funds no longer offer Investor Shares to new investors—the few that do charge $3,000 per share. Note that Vanguard Target Retirement Funds and the Vanguard STAR Fund still offer $1,000 Investor Shares. Investor Shares in actively managed Vanguard mutual funds cost $3,000.

How to Choose a Mutual Fund

When evaluating mutual funds, consider your risk tolerance and your financial goals. Once you’ve balanced your tolerance for risk against your goals, pick a mutual fund that meets your needs.

For example, if you’re a recent college graduate and are 30 to 40 years years away from retirement, picking a target-date fund that is more aggressively invested in stocks makes sense since you have more time to invest. By contrast, if you’re closer to retirement age, you may want to invest more of your money in a conservative money market or bond fund.

If you’re trying to decide between an index fund and an actively managed fund, keep in mind that actively managed funds have higher fees and much higher investment minimums. Make sure you are comfortable with the higher cost and increased risk before investing your money.

How to Buy Vanguard Mutual Funds

You have three choices for buying shares of Vanguard mutual funds:

1. Open an Account with Vanguard

You can open a brokerage account with Vanguard online. You can choose a taxable investment account, open an individual retirement account (IRA), a solo 401(k), SEP IRA, SIMPLE IRA, UGMA/UTMA or a 529 college savings account. The process takes just a few minutes, and you can link your bank account with your Vanguard account, or roll over funds from another investment account. Once the account is open, you can buy and sell mutual fund shares through your Vanguard account dashboard.

2. Buy Vanguard Mutual Funds in Your Retirement Plan

If you have an employer-sponsored retirement plan, such as a 401(k)or 403(b), you may be able to purchase shares of Vanguard mutual funds if they are among your investment choices.

3. Open an Online Brokerage Account

You can also open a brokerage accountwith another company like TD Ameritrade, Fidelity, E*Trade or Charles Schwab. With a taxable online brokerage account, you can buy and sell investments like Vanguard mutual funds, exchange-traded funds (ETFs) and individual stocks. Online brokerage account minimums and fees can vary from company to company, so do your homework before opening an account.