An Introduction to Mutual Funds

When investing in companies first began, the only option we had was stock. We were able to invest an amount of money in a company and become a very small part owner of the company. As the company grew and prospered, you could make money along the way with them. If you made a bad choice, you would lose money, but that's the way the game works.

Many were wary about placing a bet on just one company, so the idea of a mutual fund came about. A mutual fund is essentially buying a basket of numerous different stocks so you are more diversified in your investment. Instead of just investing in one company, you are now investing in hundreds of companies which will make your investment a lot safer. The best part of it, is that you have a mutual fund manager or team of managers which do they trading for you, and some of these people are very wise investors. Of course we have to pay our mutual fund manager for his work, but generally it's well worth it.

Index funds were the next bit of evolution in investments. Instead of investing in a few dozen companies your manager picks out, you would invest in the entire market. Since the mutual fund was no longer actively managed, his or her fee was reduced dramatically because the amount of work they do shrunk quite a bit. For index funds, the fees range around .2%. Of course there some years when the entire economy does not do so well, and you might lose a bit of money. Over long periods of time though, you will end up making a lot of money. The stock market has averaged a 11.8% return since its inception.

There are really three big companies which have mutual funds. There are other companies that have them, but these are the massive goliaths of the mutual fund business. These fund families have a variety of funds for nearly everything. They include Vanguard, T. Rowe Price, and Fidelity Investments. If you are a beginning investor, it's probably best to pick one of these three and stick with funds from that company.