Mutual Fund
Definition
A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities managed by a professional.
Explanation
Mutual funds offer instant diversification and professional management. Investors buy shares of the fund, which represents a portion of its holdings. Funds can be actively managed (a manager picks investments) or passively managed (tracking an index). Active funds typically have higher fees called expense ratios.
Mutual funds are priced once daily at Net Asset Value (NAV). They are suitable for investors who want diversification without researching individual securities.
Example
Investing $500/month in a mutual fund tracking the S&P 500 for 20 years with 8% average return would grow to approximately $275,000.