Maybe you’ve heard about mutual funds but don’t totally understand what they are. Well in short, a mutual fund pools the money of individual investors such as yourself, and that money is used to invest in stocks, bonds, and/or other assets. The person who decides what the money will be invested in is called a fund manager. These funds are great, especially for new and smaller investors because it’s an easy way to be invested in multiple assets for a small amount of money.

Here is a real world example: Say you have $500 you would like to invest but don’t know what to invest in. You could invest in one stock but by doing that your entire investment will depend on how that one stock is doing. By investing in a mutual fund that contains, say 50 stocks, your $500 is divided among those 50 stocks. So if a few stocks in the fund are not doing so good there might be a few others that are doing very well. This idea here is that you’re reducing your risk by being invested in multiple assets. This is known as diversification.

A few quick notes about mutual funds:

• There may be a sales charge involved depending on the fund you pick. This charge is called a load.
• There is an annual management fee. This covers the payment to the fund manager and the amount ranges from fund to fund.
• High management fees do not necessarily mean high returns on your investment and low management fees do not necessarily mean low returns on your investment.
• There are thousands of funds to choose from, each with different pros and cons.