A mutual fund is a pool of money managed by a professional (or a group of professionals) called an “investment adviser.” In a managed mutual fund, after investigating the prospects of many companies, the fund’s investment adviser will pick the stocks or bonds of companies and put them into a fund. Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall. Investors may typically pay a fee when they buy or sell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund.
A primary advantage of mutual funds versus individual stocks or bonds is the inherent diversification obtained through mutual fund investing. One caveat, however, is that simply purchasing one mutual fund might not give you adequate diversification. It is important to evaluate if the fund is “sector or industry specific. For example, investing in an oil and energy mutual fund might spread your money over fifty companies, but if energy prices fall, your portfolio will likely suffer.