Investing Stocks and Bonds

Mutual Funds

A Mutual Fund is a collection of stocks and/or bonds (and possibly other investments) made more accessible. Mutual funds pool the money of many investors and purchase investments according to either a predetermined strategy or in an effort to mimic an index, such as the Nasdaq 100 or the S&P 500.

Funds are either actively managed or passively managed. Actively managed funds are run by a manager who chooses when to buy and sell investments in an effort to produce the greatest returns for the funds investors without straying from the general principles that led those investors to sign on in the first place. Passively managed funds (called 'index funds') simply hold securities in the same proportions as the indices they seek to mimic, and buy and sell investments only to maintain the proper composition and balance.

Mutual funds offer several benefits to investors. Most importantly, individuals can invest in a broad cross-section of stocks and bonds without needing enough money to invest in each security individually. This diversification protects against isolated volatility and allows investors to bank on safer entities like a sector or certain size company instead of banking on the success of a single company. The price for these advantages is often the fee required to buy or sell shares of a mutual fund and the percentage of returns that are paid as expenses to the operators of the fund. However, some funds, and especially exchange-traded funds, eliminate a great deal of the fees involved and allow investors to buy in with minimal extra costs (see Investor Guide  Mutual Funds ).

 I have accounts with Vanguard and have a great deal of respect for them.