A jumbo loan is a mortgage that is larger than the loan-servicing limits set by the Federal Housing Finance Agency (FHFA). If you know you need a large loan to cover a higher home mortgage loan, you might be wondering how to qualify for a jumbo loan.
Key Points
• Jumbo loans are available for properties valued over $832,750, with higher limits in high-cost geographical areas.
• A credit score of 700 or higher is typically required for consumers to qualify for a jumbo loan.
• Down payments can be as low as 10%, but a higher amount can improve loan terms.
• A debt-to-income ratio below 43% is required for qualifying for a jumbo loan.
• Lenders often require up to 12 months of cash reserves to ensure financial stability.
Jumbo loan qualifications are more stringent than conforming conventional loans. Because a jumbo loan is a nonconforming loan, banks take on more risk as they are not able to sell the loan to government-sponsored enterprises Fannie Mae and Freddie Mac. Since the loans are not guaranteed by the government, lenders are more cautious about the type of borrowers they do business with.
What this means for your money: You need conditions to be pretty optimal to qualify for a jumbo loan. But it can be done. Learn more here, including:
• How to qualify for a jumbo loan
• What factors lenders consider when authorizing jumbo loans
• The jumbo loan qualification process
• How to decide if a jumbo loan is right for you
Jumbo Mortgage Requirements
The current limits for jumbo loans are defined as exceeding $832,750 for single-family homes, except in Alaska, Hawaii, and some federally designated markets that are considered high-cost. In those areas, the limit that’s exceeded is $1,249,125 since these locations tend to have pricier housing markets.
Jumbo mortgage requirements are similar to conventional conforming loan requirements, but there are some key differences that make them harder to qualify for.
A High Credit Score
Experts recommend a credit score of 700 or above for jumbo loan borrowers. A higher credit score when buying a house is indicative of a borrower’s behavior with credit and how likely they are to repay the loan. A higher credit score is needed for the higher loan amounts of a jumbo loan. That lofty score can help the lender feel more secure that you’ll pay back the amount you borrow.
Cash Reserves
A cash reserve is how much liquid money you have at your disposal. What counts as liquid money can vary from lender to lender. For example, some will allow a percentage of vested 401(k) funds to count toward the reserve requirement. Others do not.
Because jumbo loans are so large, lenders look for cash reserves in your account to guard against default. For the best jumbo loan terms, lenders can require as much as 12 months of reserves.
A Low Debt-to-Income Ratio
A debt-to-income ratio is the amount of income you make relative to the amount of debt obligations you have. If you have what is considered too much debt, the lender will not offer a loan to you. With jumbo loans, a healthy DTI ratio is essential to qualify for the mortgage. A DTI ratio below 43% is recommended.
What Does the Jumbo Qualification Process Include?
When you’re looking at jumbo loan requirements and the qualification process, there are some things you should keep in mind. Here, what’s needed to get a mortgage:
Documents Required for Jumbo Loan
When you apply for a jumbo loan, the lender will look to verify the information you provided. Some documents you may be required to provide include:
• Two years of tax returns
• Profit & Loss (P&L) statement if you’re a business owner
• Pay stubs
• Bank statements
• Documentation for other income
Loan-to-Value Ratio Evaluation
In addition to your application, the jumbo loan will require an appraisal of your property to ensure they’re not lending too much on the home (that is, more than it’s worth). This appraisal will ensure the home’s price is not too high and determine that the loan-to-value ratio (LTV) is within its guidelines.
Evaluating How Jumbo Down Payments Will Impact You
How much you put down on the home of your dreams will impact what loan you qualify for. If you’re able to put down enough, you may be able to forgo the jumbo loan requirements and get into a conforming conventional loan.
Is a Jumbo Mortgage Right for You? Questions To Ask
When it comes to making a decision on a jumbo loan, it’s helpful to ask yourself some questions that can help determine if a jumbo loan will work for you.
Do I Have Good Credit?
Ask yourself if your credit is strong enough to qualify for a jumbo loan. These mortgages do come with higher loan amounts and higher payments, and a good credit score range (700 or higher, typically) can help you get the best terms possible to qualify for a jumbo loan.
Do I Have a Low DTI and High Cash Reserves?
It’s important to have a low debt-to-income ratio and ample reserves to qualify for a jumbo mortgage, as discussed above. While some lenders may go up to as high as a 43% DTI, others will want to see a lower number.
Can I Prove I’m in Good Financial Health?
Qualifying for a jumbo mortgage goes beyond the numbers. Can you demonstrate to the lender that you’re able to continue making payments? Do you have a consistent job history? Are all the other financial factors in your life lined up so you can afford the mortgage?
Is the Property Value High Enough for a Jumbo Loan?
The jumbo loan value minimum (and conforming loan limits) is $832,750 for most areas in the U.S. If your mortgage is below this amount, you’ll want to look at financing with a conforming conventional loan instead. In high-cost areas, the home would have to hold a value of more than $1,249,125.
Do I Have Enough Money Saved?
A down payment on a property that merits a jumbo loan will often be a significant amount of cash. And while some closing costs are a flat fee that won’t go up, many are labor-intensive or percentage-based (2% to 5% of the loan amount), so your jumbo loan closing costs are larger than for a conventional, conforming loan.
If you are in the market for a high-value home, a jumbo mortgage can help you make it your own. However, you will need to meet the loan requirements, which may be somewhat more demanding than those for a conforming loan. By focusing on optimizing your credentials and financial profile, you can work to secure the mortgage that makes your home-ownership dreams come true.
When you’re ready to take the next step, consider what SoFi home loans have to offer. Jumbo loans are offered with competitive interest rates, with no PMI, and down payments as low as 10%.
SoFi Mortgage Loans: We make the home loan process smart and simple.
FAQ
Is it harder to qualify for a jumbo loan?
Yes, jumbo loans are harder to qualify for. You will need a larger down payment than you would with a conforming loan, a higher credit score, a low debt-to-income ratio, more cash reserves, and a tighter loan-to-value ratio.
What credit score do you need for a jumbo loan?
For a jumbo loan, you may want to aim for a credit score above 700.
Do jumbo loans require a 20% down payment?
Sometimes they do. But it is possible to obtain a jumbo loan with a down payment as low as 10% or possibly even lower.
Photo credit: iStock/lovenimo
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Many people hit a period of financial hardship at some point in their lives. Maybe there’s a medical emergency and big bills, a job layoff, or a family member in serious need: These and other scenarios can put your money management in a precarious position.
Approximately 73% of Americans report feeling stressed about money, according to an April 2025 CNBC/SurveyMonkey poll. Financial stress can be triggered by anything from the high cost of living to excess debt to worrying about saving for one’s (and one’s family’s) future.
Here, you’ll learn more about what happens when financial hardship hits and how to take steps to improve the situation, from applying for assistance to negotiating with lenders to discovering new sources of income.
Key Points
• Financial hardship can be temporary or long-term, and often requires tailored strategies to address.
• Creating a budget and cutting nonessential expenses can help manage financial difficulties.
• Consolidating debt with a personal loan can simplify and potentially reduce the total interest paid.
• Turning hobbies into side hustles can provide additional income to support financial recovery.
• Contacting lenders and service providers for assistance can help prevent further financial strain.
What is Financial Hardship?
Everyone probably has their own definition of “economic hardship” that’s based on their own needs and wants. And the federal government has its own criteria for what counts as a “hardship” when it comes to taking an individual retirement account (IRA) distribution, looking for tax relief, or requesting a student loan deferment.
But generally, a financial hardship is when an individual or family finds they can no longer keep up with their bills or pay for the basic things they need to get by, such as food, shelter, clothing and medical care.
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Warning Signs
Sometimes financial difficulties can sneak up on a person, and catch them completely off guard. Other times, the warning signs have been there for a while, but were missed or ignored.
Identifying the root cause of financial distress can help give you a head start on working through your money issues. What follows are some red flags that may signal you are headed for financial difficulty or hardship.
Having Credit Card Balances at or Above the Credit Limit
While using credit cards may seem like a good way to get around a short-term lack of funds, the practice could lead to extra fees and negatively impact your credit. The percentage of available credit someone is using — known as a credit utilization ratio — can indicate to lenders how heavily they’re depending on credit cards to get by. And because it’s one of the major factors in determining a person’s overall credit score, financial advisors typically recommend keeping card balances at or below 30% of the limit.
Juggling Which Bills Get Paid Each Month
It may be tempting to skip a payment from time to time, hoping to catch up eventually — but there can be short- and long-term consequences for juggling bills. Insurance coverage may be lost. There may be a late fee, or a bill could be turned over to a collection agency.
Utilities can also be shut off, and a deposit might be required to restart the account. Making late payments on a credit card could lead to a higher interest rate on the account. And late payments and defaults can hurt credit scores.
It may be necessary to make minimum payments if times are especially tight, and there likely won’t be any short-term harm. But even if you stop making purchases, just the interest charged will keep the account balance growing, possibly extending the amount of time it takes to pay down that debt by months or years.
Often Paying Late Fees or Overdraft Fees
A one-time mistake may serve as an annoying reminder to be more cautious with money management, but if late fees, overdraft and non-sufficient funds fees, and overdraft protection transfers become a regular thing, they can add another layer of worry to your financial burden. (Using alerts, automatic payments, and apps from your financial institution may offer a more effective method to track bills as well as deposits and withdrawals.)
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Having a High Debt-to-Income Ratio
Lenders often use a person’s debt-to-income ratio — a personal finance measure that compares the amount of debt you have to your income — to determine if a borrower might have trouble making payments. If a person’s debt-to-income ratio is high, it could make it more difficult to borrow money, or to get a good interest rate on a loan.
Tapping Retirement Savings to Pay Monthly Bills
In certain cases, the IRS will allow an account holder to withdraw funds from a 401(k) or IRA to cover an immediate and heavy financial need (such as medical expenses, payment to avoid eviction or repair home damage) without paying the 10% early withdrawal penalty. But taxes will still have to be paid on those distributions. And taking that money now, instead of letting it grow through the power of compound interest, could have serious repercussions for the future.
Dealing with Financial Hardship
For those who’ve been struggling for a while, or who’ve had a sudden but substantial financial loss, it might feel as though you’ll never recover. But there are several options you might consider taking to get back on track. Some you can do for yourself, while others might require getting financial hardship help from others. And while some might be temporary, others take a longer view. Here are a few:
Reducing Monthly Spending
Creating a monthly budget can help guide your spending decisions and make the most of the money you have. This may involve prioritizing your monthly expenses, starting with the essentials and going down to the “nice to haves.” Once you’ve established which expenses are the most important, you can then look for places to cut back or things to cut out of your budget altogether. Cutbacks may not feel fun, but they can help jump-start your recovery.
For example, could you cut costs if you cooked meals yourself more often? Are you trying too hard to keep up with what friends and family are spending on clothes, vacations, and cars? Are there monthly bills that could be reduced? (For example, you might be able to save money on streaming services, internet, and phone services; manicures and other beauty treatments; or even rent, insurance, or car payments.) It may help to start by tracking expenses for a month or so to get an idea of where money is going, and then sit down and map out a more realistic path for the future.
Creating a Debt Reduction Plan
Along with a budget, it also may be useful to come up with a plan for paying down credit card balances, student loans, and other debt. It’s important to always make the minimum payment on all these bills, if possible, but a personal debt reduction plan could help with prioritizing which bill any leftover money might go toward after all the household expenses are paid each month — or the money might come from a tax refund, bonus check from work, or a gift. Knocking down debts that include high amounts of interest can eventually free up more cash to put toward short- or long-term savings goals.
💡 Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.
Looking for Ways to Earn Extra Income
Is there a way to turn a hobby, skill, or interest into some extra funds? Maybe a favorite local business could use some part-time help. Or, if a second job is out of the question, perhaps a side hustle with flexible hours is a possibility. Writers, artists, and designers, for example, may be able to turn their talents into a side business. Babysitting the neighbor’s kids or running errands for an older person are also options. And, of course, on-demand services like Uber and DoorDash are employing drivers, delivery persons, and other workers.
Considering a Loan to Consolidate Bills
Getting a personal loan for debt consolidation won’t make money problems go away completely — but it might make managing payments a little simpler. With just one monthly payment (instead of separate bills for every credit card or loan) it can be easier to keep tabs on how much is owed and when it’s due.
Because interest rates for personal loans are typically lower than the interest rates credit card companies offer (especially if a rate went up because of late payments), the payoff process for that debt could go faster and end up costing less. (Generally, lenders offer a lower interest rate to those who have a higher credit score; borrowers who are already behind on their bills may pay a higher interest rate or have more trouble getting a loan.)
Student loan borrowers also may want to look into consolidating and refinancing with a private lender to get one manageable payment and, possibly, save money on interest with a shorter term or a lower interest rate. Refinancing may be a solution for working graduates who have high-interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans.
Just keep in mind: Federal loans carry some special benefits that private loans don’t offer, including public service forgiveness and economic hardship programs, so it’s important for borrowers to be clear on what they’re getting and what they might lose if they refinance.
Notifying and Negotiating
Ignoring credit card payments and other debts won’t make them disappear. Borrowers who can clearly see they’re headed for financial trouble may wish to notify their credit card company or lender and try to work out a more manageable payment arrangement. (There are debt settlement companies that will do the negotiating, but they charge a fee for their services.)
A credit card issuer may agree to a reduced, lump-sum payment or a repayment plan based on the borrower’s current income, or it may offer a hardship program with a lower interest rate, lower minimum payments, and/or reduced penalties and fees. The options available could depend on why a customer fell behind, or if they’ve had problems before.
Financial hardship assistance is sometimes offered by mortgage lenders. Because these lenders generally don’t want their borrowers to foreclose on their homes, it’s in their best interest to work with borrowers when they get in trouble. The lender may be willing to help the borrower get caught up by forgiving late payments, or they may change the interest rate of the loan or lower the payment.
If you have federal student loans and are experiencing financial hardship, you might qualify for a special repayment plan, such as pay-as-you-earn, or an income-based repayment plan.
It can also be helpful to reach out to service providers (such as water, electricity, internet) and let them know you are experiencing financial difficulties. Providers may be willing to work with you and you may be able to come to an agreement well before any shut-off actions go into effect. This can also save you from late fees, or going into collections.
Getting Financial Help
There are also a number of government programs designed specifically to help people overcome sudden financial hardships. Those who’ve lost a job may be entitled to unemployment benefits. If that job provided health insurance, you may want to look into COBRA to see if you can maintain affordable health insurance. Those who were injured at work may be entitled to workers’ compensation.
Also, some people facing financial hardship may qualify for state or federal benefits like Medicaid or Social Security Disability.
Though not free, a financial professional who specializes in planning, saving, and investing may be a worthwhile investment. They may be able to offer a fresh perspective and help create a path to financial freedom. There may also be free or low-cost debt counselors available via non-profit organizations.
Preparing for Current and Future Challenges
Once you’ve developed your personal plan for overcoming financial hardship, you can begin working on your goals of becoming more financially independent. If the cause of your hardship is temporary (you were out of work but quickly found a new job, for example), it may take just a few months to get back on your feet. If the problems are more difficult to overcome (you’ve lost income through a divorce, or you or a loved one has an ongoing medical condition that requires expensive treatment), the timeline could be much longer. Once you’ve put your plan in place, you may want to review it on a regular basis, and perhaps do some fine-tuning.
The Takeaway
Many people go through periods of financial hardship, and often for reasons that are beyond their control. But that doesn’t mean they are out of options. There are many simple and effective steps you can take. Cutting monthly expenses, consolidating debt, and getting outside assistance are moves that can help you get back on the right financial track.
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Understanding Nasdaq listing rules and how a stock exchange works can be helpful when mapping out an investing strategy and determining which stocks to purchase. As such, before a stock can be traded by investors, it must first be listed on an exchange. Different stock exchanges can have physical locations with in-person trading or be entirely electronic.
After the New York Stock Exchange (NYSE), the Nasdaq is the second-largest stock exchange in the world. Not just any company can be listed for trading on the Nasdaq, however. There are specific Nasdaq listing requirements that must be met as a condition of inclusion. These rules are designed to ensure that only reputable companies can trade on the exchange.
Key Points
• Nasdaq mandates precise financial standards, including market capitalization, earnings, cash flow, and revenue.
• A minimum share price of $4 is required for companies listed on Nasdaq; those with a lower price may qualify if certain requirements are met.
• Companies must adhere to ongoing standards to avoid delisting from Nasdaq.
• Corporate governance rules are strictly enforced for all Nasdaq-listed companies.
• Listing fees on Nasdaq vary based on company specifics.
What Is the Nasdaq?
The Nasdaq plays an important role in the history of the stock market. It’s an electronic stock exchange founded in 1971 by the National Association of Securities Dealers. Nasdaq is an acronym for National Association of Securities Dealers Automatic Quotations.
In terms of how many companies are on Nasdaq, the exchange lists approximately 3,300 common stocks, as of April 2025. Those stocks represent a diverse range of industries, including financial services, health care, retail, and tech stocks.
In addition to identifying the stock exchange itself, the term “Nasdaq” can also be used as shorthand when referencing the Nasdaq Composite Index. This stock market index tracks the performance of approximately 2,500 stocks listed on the Nasdaq exchange, as of April 2025.
The Nasdaq Composite is a capitalization-weighted index, meaning its makeup is determined by market capitalization. Market cap is a measure of a company’s value as determined by its share price multiplied by the total number of outstanding shares. The Nasdaq Composite includes some of the largest U.S. companies by market cap.
Nasdaq Listing Requirements
The Nasdaq doesn’t include every publicly traded company in the U.S. In order to be included on the exchange, companies must first meet Nasdaq listing rules. These rules apply to companies that are seeking to have common stocks on the exchange.
Nasdaq listing requirements span a number of criteria:
• Earnings
• Cash flow
• Market capitalization
• Revenue
• Total assets
• Stockholders’ equity
• Bid price
The Nasdaq listing rules allow companies to qualify under one of four sets of standards, based on the criteria listed above.
Standard 1: Earnings
A company’s earnings are a reflection of its profitability. To qualify for listing on the Nasdaq based on earnings alone, a company must be able to show:
• Aggregate pre-tax earnings of $11 million or more for the three prior fiscal years
• Earnings of $2.2 million or more for the two most recent fiscal years
• Zero net losses for each of the three prior fiscal years
For a company to be included under this standard, they have to be able to check off all three of these boxes. If they can meet two criteria but not a third, they won’t be able to qualify for listing.
Standard 2: Capitalization with Cash Flow
Capitalization is a measure of a company’s size in relation to the rest of the market. Cash flow tracks the movement of cash in and out of a company. To qualify for Nasdaq listing under the capitalization with cash flow standard, the following rules apply:
• Aggregate cash flow of $27.5 million or more in the prior three fiscal years
• Zero negative cash flow for the prior three fiscal years
• Average market capitalization of $550 million or more over the prior 12 months
• Revenue of $110 million or more for the previous fiscal year
Again, all four of those conditions have to be met to qualify for Nasdaq listing using this standard.
Standard 3: Capitalization with Revenue
The third Nasdaq listing standard focuses on company size and revenue, which is a measure of income. The minimum requirements for both are as follows:
• Average market capitalization of $850 million or more over the prior 12 months
• Revenue of $90 million or more for the previous fiscal year
Larger companies may opt to take this route if they can’t meet the cash flow requirements under Standard 2.
Standard 4: Assets with Equity
In lieu of earnings or market capitalization, companies can use their assets and the value of shareholders’ equity to qualify for listing on the Nasdaq. There are three specific thresholds companies have to meet:
• Market capitalization of $160 million
• Total assets of $80 million
• Stockholders’ equity of $55 million
Regardless of which standard a company uses to qualify for listing, they have to maintain them continually. Otherwise, the company could be delisted from the Nasdaq exchange.
General Nasdaq Listing Rules
Aside from meeting the listing requirements set forth for each standard, there are some general Nasdaq listing requirements companies have to observe.
For example, the Nasdaq minimum share price or bid price for inclusion is $4. It’s possible to qualify with a bid price below that amount but that may entail meeting additional requirements.
Companies must also have at least 1.25 million publicly traded shares outstanding. That threshold applies to both seasoned companies and those seeking their initial public offering (IPO). Additionally, IPO requirements specify that the market value of those shares must be at least $45 million. For seasoned companies, the market value requirement increases to $110 million.
Nasdaq listing rules also cover criteria related to corporate governance. Under those requirements, companies must:
• Make annual and interim reports available to shareholders
• Have a majority of independent directors on the board of directors
• Adopt a code of conduct that applies to all employees
• Hold annual meetings of shareholders
• Avoid potential or actual conflicts of interest
Companies must also pay a listing fee to gain entry to the Nasdaq. Entry fees can range from $150,000 to $295,000, depending on the total number of shares outstanding. Those amounts include a non-refundable $25,000 application fee. Paying the fee doesn’t guarantee that a company will be listed on the Nasdaq.
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How to Choose NASDAQ Stocks
Knowing how stocks are chosen for the Nasdaq and other exchanges can be helpful in conducting your own research when deciding what to buy or sell. Listing on the Nasdaq or NYSE can also be important for a company in terms of which exchange-traded fund it gets added into. Broadly speaking, there are two ways to approach stock research: technical analysis and fundamental analysis.
Technical analysis focuses on market trends, momentum, and day-to-day movements in stock pricing. You may use a technical analysis approach for choosing stocks if you’re an active day trader who’s interested in capitalizing on market trends to make short-term gains.
Using fundamental analysis on stocks, on the other hand, focuses on a company’s financial health. That includes things like earnings, profitability, and how much debt the company has. Using a fundamental approach may be preferable if you favor a long-term, buy-and-hold strategy. And fundamental analysis echoes how the Nasdaq and other stock exchanges determine which stocks to include.
The Takeaway
Becoming a savvy investor starts with learning the basics of how the stock market and stock exchanges such as the Nasdaq work. Understanding Nasdaq listing requirements can offer insight into how stock exchanges select which companies to offer for trading.
While the Nasdaq doesn’t include every publicly traded company in the U.S., as noted, there are guidelines and rules that companies that are listed, or wish to be listed, must abide by.
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About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Investment funds are financial tools that effectively allow investors to pool their resources to buy into a collection of securities. It’s relatively common and easy for beginning investors to dip their toes in the market with investment funds for a variety of reasons.
But there are many types of investment funds, and the purported benefits of a specific fund may not be the right choice for each investor. With that in mind, it’s generally a good idea to have a deeper understanding of investment funds before buying into one.
Key Points
• Investment funds pool money from multiple investors to buy a diversified portfolio.
• Funds are generally managed by professionals who make investment decisions.
• Common types of funds include mutual funds, ETFs, and index funds.
• Investors benefit from diversification and professional management.
• Fees and performance vary; investors should review fund details.
What Is an Investment Fund?
Broadly speaking, an investment fund is a collection of funds from different people that is used to buy financial securities. Investors get the advantages of investing as a group (purchasing power) and own a portion, or percentage of their investments equal to the money they have contributed.
There are different types of investment funds, including mutual funds, exchange-traded funds (ETFs), and hedge funds. Typically, these funds are managed by a professional investment manager who allocates investors’ money based on the type of fund and the fund’s goal. For this service, investors are generally charged a small fee that is a percentage of their investment amount.
What Is a Mutual Fund?
Mutual funds are a popular type of investment fund for a reason: they are an easy way to purchase diversified assets — from stocks and bonds to short-term debt — in one transaction.
One of the fundamental ideas that led to the creation of mutual funds was to provide individual investors with access to investments that might be more difficult to obtain or manage on their own. A retail investor with $1,000 probably wouldn’t be able to effectively recreate a portfolio that tracks the S&P 500, let alone rebalance it quarterly.
But thanks to the creation of mutual funds, investors can pool all of their money together into a collective fund to invest in the same markets by choosing from custom-packaged funds with specific focuses and inexpensive share prices.
Different Types of Mutual Funds
There are a number of different types of mutual funds, each of which offer something distinct to the investor.
Equity Funds
Also known as stock funds, equity funds are a type of mutual fund that invests in a specific asset class, principally in stocks. Equity fund managers seek to outperform the S&P 500 benchmark by actively investing in growth stocks and undervalued companies that may provide higher returns over a period of time than the fund’s benchmark.
Equity funds have higher potential returns but are also subject to higher volatility as well. It’s common for equity funds to be actively managed and thus typically charge higher operating fees. Funds with higher stock allocations are more popular with younger investors as they allow for growth potential over time.
While equity is a specific asset investment by itself, some mutual funds focus on more precise criteria:
Fund Size (Market Cap)
Some funds only include companies with a defined market cap (market value). Different tiers of company sizes can perform differently in different economic conditions, and companies can be viewed as more or less risky based on their market cap. Fund sizes are categorized by the following:
• Large-cap (More than $10 billion)
• Mid-cap ($2 billion to $10 billion)
• Small-cap ($300 million to $2 billion)
Industry/Sector
These are funds that focus specifically on a single industry or sector, such as technology, health care, energy, travel, and more. Owning shares in different sector mutual funds provides portfolio diversity and can potentially enhance returns if a particular industry experiences a tailwind.
Growth vs Value
Some funds differ in their investment style, focusing on either value or growth. Growth stocks are expected to provide outsized returns, though these tend to be higher risk, whereas value stocks are considered to be undervalued.
International/Emerging Markets
Domestic stocks are not the only equity investment options, as some funds focus exclusively on international and emerging markets. International and emerging market funds provide geographic diversity — exposure to companies operating in different countries and countries with growing markets.
Bond Funds
Like stock mutual funds, bond funds are pools of investor funds that are invested in short- or -long-term bonds from issuers such as the U.S. government, government agencies, corporations, and other specialized securities. Bond funds are a common type of fixed-income mutual funds where investors are paid a fixed amount on their initial investment.
Seeing as how bonds are frequently thought of as a less-risky investment than stocks and offer less growth, bond funds are popular among investors who are looking to preserve their wealth.
Index Funds
This type of fund is constructed to track or match the makeup and performance of a financial market index such as the S&P 500. They provide broad market exposure, low operating expenses, and relatively low portfolio turnover. Unlike equity funds, an index fund’s holdings only change when the underlying index does.
Index fund investing has exploded in popularity in recent years due to its low costs, passive approach, and abundance of options to pick from. Investors may choose from a number of indices that focus on different sectors such as the S&P 500 (financial and consumer), Nasdaq 100 (technology), Russell 2000 (small-cap), and international indices.
Balanced Funds
Also known as asset allocation funds, these hybrid funds are a combination of investments in equity and fixed-income with a fixed ratio, such as 80% stocks and 20% bonds. Balanced funds offer diversification by spreading funds across different asset classes and consequently trade some growth potential in an attempt to mitigate some risk.
One example of a balanced fund is a target-date retirement fund, which automatically rebalances the investments from higher-risk stocks to lower-risk bonds as the fund approaches the target retirement date.
Money Market Fund
This low-risk, fixed-income mutual fund invests in short-term, high-quality debt from federal, state, or local governments, or U.S. corporations. Assets commonly held by money market funds include U.S. Treasuries and Certificates of Deposit. These funds are usually among the lowest-risk types of investments.
Alternative Funds
For those seeking portfolio diversity beyond traditional stocks and bonds, it may be worth considering alternative investment funds. Alternative funds focus on other specific markets, such as real estate, commodities, private equity, or others. They tend to be higher risk in exchange for the potential to offer higher returns.
These asset classes generally make up a small percentage of one’s portfolio, if at all, and serve as a hedge to heavier-weighted allocations to traditional sectors. Rather than investing in companies of a particular index or market cap, alternative funds may be composed of shares of natural gas drilling companies, real estate investment trusts (REITs), intellectual property rights, or more.
Benefits of Investing in Mutual Funds
While no two funds are the same, mutual funds are a popular choice for investors of all types for a variety of reasons.
Diversification
Mutual funds serve as a sort of investment basket that contains many different assets, some with the same general focus and others with multiple focuses. Rather than being all-in on one particular investment, mutual funds offer diversity across multiple investments.
This allows investors to cast a wider net and benefit when one or multiple of their basket investments performs well. Conversely, when one investment in a mutual fund does poorly, the loss may be mitigated by also having other investments that are performing comparatively well. Some types of funds offer greater diversification across different asset classes, such as stocks and bonds.
Performance
Mutual funds that aim to track indices or focus on growth stocks typically yield similar market performance compared to the benchmark index. This is more or less the same goal of a buy-and-hold strategy, as fund performance often, but not always, mirrors the tracked index.
Low Maintenance
Mutual funds are relatively easy to use and require little to no maintenance. They allow investing in multiple asset classes through one investment vehicle without having the investor sift through and make individual decisions. All of these decisions are usually provided by an active fund manager whose responsibility is to provide profitable returns for investors based on the fund’s general focus or target.
Mutual funds also provide a degree of functionality. One convenient feature is the ability to set a passive monthly investment amount and to automatically reinvest dividends. Many mutual funds pay investors dividends on an annual, quarterly, or even monthly basis. Dividends are calculated based on the underlying companies’ earnings and distributed to the fund, which then passes them along to fund investors. Another feature of mutual funds is the ability to reinvest dividends, thus compounding both mutual fund holdings and dividends in perpetuity.
Liquid
Mutual funds are transacted frequently. Investors are able to easily buy or redeem mutual fund shares daily at the market open. Shares in funds tend to be relatively affordable as they typically have a low net asset value (NAV), allowing even novice investors to buy shares with a low starting amount. Compare this to ETFs which can be transacted repeatedly at any time during market hours, but the price can rise to seemingly out-of-reach levels for a beginner.
Active Management
Mutual funds are usually actively managed by a professional fund manager who’s responsible for operating the fund, whether it be to allocate investor money, rebalance the fund’s investments, or distribute dividends to investors.
While mutual funds tend to have relatively low fees, investors are subject to an annual fee, also known as an expense ratio, that is calculated as a percentage of each individual’s holdings in the fund and automatically paid to the fund manager for their services. Fund fees vary, so in some cases it may be helpful to compare fees before investing.
Can I Lose Money in a Mutual Fund?
With investing, there is no such thing as a sure thing. So, yes, you can lose money in a mutual fund. It is possible to lose all of your money in a mutual fund if the securities in the fund drop in value.
As always, it’s prudent to research exactly what’s contained in a particular mutual fund before investing any capital. Ultimately, it’s every investor’s responsibility to determine their own risk tolerance and investing strategy that meets their personal needs.
The Takeaway
Investment funds are a practical and beginner-friendly way to start investing in financial markets. Even with beginner knowledge concerning what is a mutual investment fund, mutual funds have the propensity to provide a hands-off and potentially low-cost way to start building wealth. But again, your mileage may vary, as not all funds are alike.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
