Identification

Mutual funds are simply groups of stocks, packaged together as a single investment by mutual fund managers and/or financial companies. The label mutual fund comes from the practice of pooling the money of many investors to buy a group of different stocks (sometimes hundreds or thousands of stocks) that would be unaffordable if an investor had to buy each stock himself.

Types

The most important distinction among mutual funds is managed versus unmanaged. In the case of a managed fund, a fund manager decides (based on his own opinion and research) which stocks will make up the fund. If the fund manager makes good decisions, the fund may have high returns and outperform the market as a whole. However, if the manager chooses poorly, the fund will underperform. Also, managed funds often charge high fees in order to pay these managers, which can undercut returns.

Types

Conversely, the stocks in an unmanaged fund are not chosen by a manager, but instead are assembled to mirror the makeup of a major market index, like the S&P 500. These funds are also known as index funds. Because an index fund simply tracks a specified sector of the market, it will never outperform or underperform that market sector. Due to the elimination of human input, index funds are considered less exciting than managed funds (no chance of fantastic returns in a year where the market was down) but also less risky (no chance of lackluster returns in a great market year). Index funds usually have lower fees and expenses than their managed counterparts, which helps to bolster returns.

Considerations

Resources

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