By now most of us have some experience with mutual funds. We have them in our 401(k) accounts or our IRAs. Often we have a limited set to choose from on our company’s investment plan. Nevertheless most of us have at least seen one.
Mutual funds are collectives of investor money that are managed and invested in underlying equities. A professional is hired to operate the fund, called the fund manager, and generally he is guided by a prospectus, which provides guidelines to what kind of investing the fund will do.
Usually funds invest in stocks, bonds and other types of cash accounts with which you are probably familiar. However, they can invest in just about anything and can vary the proportions. Usually these investments and proportions are reallocated periodically by the fund manager to do what will maximize returns in his or her judgment.
There is a particular kind of mutual fund which should be of special note to the average investor, the index fund. These are funds in which the collective pool of investment money is used to buy weighted shares of a given index. There really isn’t much for the manager to do in these funds and so often his or her fees are very low.
While index funds may not sound terribly exciting, over time they tend to outperform just about every other strategy. By investing in the stock market as a whole, you can lock in roughly the returns that the stock market will average. Believe it or not, over long periods of time this tends to beat just about every managed fund out there.
Ultimately there is much more to know about investing in mutual funds, but for those who do not have much experience, it makes a lot of sense to start by looking at index funds. Before you invest a lot of time and energy into dissecting mutual funds, it can make sense to start with a baseline.